SKF - Annual Report 2021 | FinancialReports.eu

894500JU9WRAJQOVBI122021-01-012021-12-31894500JU9WRAJQOVBI122019-12-31ifrs-full:RetainedEarningsMember894500JU9WRAJQOVBI122019-12-31ifrs-full:EquityAttributableToOwnersOfParentMember894500JU9WRAJQOVBI122019-12-31ifrs-full:NoncontrollingInterestsMember894500JU9WRAJQOVBI122019-12-31skf:TotalMember894500JU9WRAJQOVBI122020-01-012020-12-31ifrs-full:RetainedEarningsMember894500JU9WRAJQOVBI122020-01-012020-12-31ifrs-full:EquityAttributableToOwnersOfParentMember894500JU9WRAJQOVBI122020-01-012020-12-31ifrs-full:NoncontrollingInterestsMember894500JU9WRAJQOVBI122020-01-012020-12-31skf:TotalMember894500JU9WRAJQOVBI122020-01-012020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember894500JU9WRAJQOVBI122020-01-012020-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember894500JU9WRAJQOVBI122020-01-012020-12-31894500JU9WRAJQOVBI122020-12-31ifrs-full:IssuedCapitalMember894500JU9WRAJQOVBI122020-12-31ifrs-full:SharePremiumMember894500JU9WRAJQOVBI122020-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember894500JU9WRAJQOVBI122020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember894500JU9WRAJQOVBI122020-12-31ifrs-full:RetainedEarningsMember894500JU9WRAJQOVBI122020-12-31ifrs-full:EquityAttributableToOwnersOfParentMember894500JU9WRAJQOVBI122020-12-31ifrs-full:NoncontrollingInterestsMember894500JU9WRAJQOVBI122020-12-31skf:TotalMember894500JU9WRAJQOVBI122021-01-012021-12-31ifrs-full:RetainedEarningsMember894500JU9WRAJQOVBI122021-01-012021-12-31ifrs-full:EquityAttributableToOwnersOfParentMember894500JU9WRAJQOVBI122021-12-31894500JU9WRAJQOVBI122021-01-012021-12-31ifrs-full:NoncontrollingInterestsMember894500JU9WRAJQOVBI122021-01-012021-12-31skf:TotalMember894500JU9WRAJQOVBI122021-01-012021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember894500JU9WRAJQOVBI122021-01-012021-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember894500JU9WRAJQOVBI122021-12-31ifrs-full:IssuedCapitalMember894500JU9WRAJQOVBI122021-12-31ifrs-full:SharePremiumMember894500JU9WRAJQOVBI122021-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember894500JU9WRAJQOVBI122021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember894500JU9WRAJQOVBI122021-12-31ifrs-full:RetainedEarningsMember894500JU9WRAJQOVBI122021-12-31ifrs-full:EquityAttributableToOwnersOfParentMember894500JU9WRAJQOVBI122020-12-31894500JU9WRAJQOVBI122021-12-31ifrs-full:NoncontrollingInterestsMember894500JU9WRAJQOVBI122021-12-31skf:TotalMember894500JU9WRAJQOVBI122019-12-31894500JU9WRAJQOVBI122019-12-31ifrs-full:IssuedCapitalMember894500JU9WRAJQOVBI122019-12-31ifrs-full:SharePremiumMember894500JU9WRAJQOVBI122019-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember894500JU9WRAJQOVBI122019-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMemberiso4217:SEKiso4217:SEKxbrli:shares Annual Report 2021 When have you relied on rotation today? Our products and services are found everywhere in society. In fact, wherever there’s movement, SKF’s solutions may be used. This means that we’re an important part of the everyday lives of people and companies around the world. CONTENTS SUSTAINABILITY REPORT Sustainability disclosures in the Annual Report have undergone limited assurance engagement by SKF’s auditors. See the Auditor’s Limited Assurance Report on the Sustainability Report and statement regarding the Statutory Sustainability Report on page 138. The deﬁnition of the Statutory Sustainability Report is presented on page110. CORPORATE GOVERNANCE REPORT The Corporate Governance Report examined by the auditors can be found onpages 139–146. TheAuditor’s Report on the Corporate Governance Report can be found on page 147. REMUNERATION REPORT The Remuneration Report can be found on pages 156–158. ADMINISTRATION REPORT The Administration Report has been audited by SKF’s external auditors. Seethe Auditor’s Report on pages 106–109. It’s about the business. However, we also see it as a moral obligation to help our customers move away from fossil fuel dependency and into the world of clean technology. By making products lighter, more efﬁcient and with a smaller environ- mental footprint, we’re striving for asmarter and better industry. SKF OVERVIEW This is the SKF Group ............................................................. 4 President’s letter .................................................................. 10 STRATEGY AND VALUE CREATION Strategy, Intelligent and clean growth ............................. 14 Why invest in SKF ................................................................. 20 How SKF creates value ........................................................ 22 Trends and drivers ............................................................... 22 Long-term targets ................................................................ 24 Sustainability targets ........................................................... 26 Sustainability framework ................................................... 28 SKF’S GLOBAL PRESENCE A leader on the world bearing market .............................. 32 The bearing market ............................................................. 34 SKF in the markets ............................................................... 38 Risk management including sustainability risks ............ 42 The SKF share ........................................................................ 46 The Board of Directors’ proposal for a resolution on principles of remuneration for Group Management .......48 Nomination of Board members and notice of Annual General Meeting ...................................... 52 Capital structure, ﬁnancing, credit rating and dividend policy ....................................................................... 52 FINANCIAL STATEMENTS .............................................. 53 Consolidated income statements ...................................... 54 Consolidated statements of comprehensive income ................................................... 54 Consolidated balance sheets ...............................................56 Consolidated statements of cash ﬂow ...............................58 Consolidated statements of changes in equity ............... 61 Notes to the consolidated ﬁnancial statements ............. 62 FINANCIAL STATEMENTS, PARENT COMPANY Parent Company, AB SKF ................................................... 94 Parent Company income statements ............................... 94 Parent Company statements of comprehensive income ....................................................... 94 Parent Company balance sheets ....................................... 95 Parent Company statements of cash ﬂow ....................... 96 Parent Company statements of changes in equity ..........97 Notes to the ﬁnancial statements of the Parent Company ........................................................ 98 Proposed distribution of surplus ................................... 105 Auditor’s Report ................................................................. 106 SUSTAINABILITY STATEMENTS .............................. 110 General disclosures ........................................................... 111 SKF’s material topics ........................................................ 117 Economic category ............................................................. 117 Environmental category .................................................. 119 Social category ................................................................... 126 The EU Taxonomy .............................................................. 137 Auditor’s Limited Assurance Report on the Sustainability Report and statement regarding the Statutory Sustainability Report ............................... 138 CORPORATE GOVERNANCE REPORT ..................... 139 Board of Directors ............................................................. 144 Auditor’s Report on the Corporate Governance Report ........................................ 147 Group Management .......................................................... 148 SKF GROUP ....................................................................... 152 Seven-year review ............................................................. 152 Three-year review ............................................................ 153 Per-share data ................................................................... 153 Distribution of shareholding ........................................... 153 Deﬁnitions ........................................................................... 154 General information .......................................................... 155 REMUNERATION REPORT .......................................... 156 • 2021 was a strong year with solid growth and improved margins, especially during theﬁrst half of the year. • Continued investments in world-class manufacturing with, among others, SEK 400 million invested in expanding and modernizing the manufac- turing facility in Airasca, Italy. 2021 in brief SKF’s long-term targets The long-term targets shall be achieved over a business cycle. TARGET TARGET 202 1 OUTCOME 202 1 OUTCOME Operating margin 1) 13.3%14% Revenue growth 2) 12.6%5% 50% 42% Dividend pay-out ratio zero – 37% 5) Net zero by 2030 4) <40% 12.5% Net debt 3) /equity 16% 14.9% ROCE 1) To be updated To be updated To be updated 1) Adjusted for items affecting comparability. 2) Including acquisitions, adjusted for divestments. 3)Excluding pension liabilities. 4) Own operations scope 1 and 2. 5) Absolute reduction in scope 1 and2 emissions since 2015 base year. 6) Net cash ﬂow after investments before ﬁnancing. • Rickard Gustafson joined SKFas President and CEO on 1June 2021. • In addition to the net zero objective for SKF’s operations by 2030, we announced our commitment to have asupply chain with net zero greenhouse gas emissions by2050. 0 20 40 100 SEK billion 60 80 201918 21 81.7 86.0 75.0 85.7 Net sales 0 3 6 15 % 9 12 21201918 11.8 12.3 12.2 13.3 Operating margin 1) 0 6 4 2 8 201918 21 Cash ﬂow 6) 1.4 8.3 5.3 5.0 10 SEK billion 4 SKF Annual Report 2021 SKF OVERVIEW SKF is a leading global supplier of solutions for rotating equipment. We combine hands-on industry experience with a vast product portfolio and knowl- edge around bearings, seals, lubrication management, condition monitoring and maintenance services. One of our strengths is the ability to keep developing new technologies that offer competitive advantages to customers, and at the same time, contribute to asustainable society. SKF’s products are used all over the world and in a large variety of rotating applications, ranging from renewable energy, such as wind and ocean power, toheavy industries like mining, metal, and pulp and paper. Our products are also used in cars and com- mercial vehicles, as well as in bicycles, skateboards and household appliances. This is the SKF Group World-leading experts on rotation 87 MANUFACTURING UNITS 15 TECHNOLOGY CENTERS 42,602 EMPLOYEES >17,000 DISTRIBUTORS 40 CUSTOMER INDUSTRIES 130 COUNTRIES 5 SKF Annual Report 2021 A strategy for intelligent and clean growth In the beginning of 2022, we presented a new strategic framework based on two concepts: intelligent and clean. These concepts will guide us on our journey to become an even more focused, innovative and proﬁtable indus- trial player. Our broad business reach gives us a platform to drive proﬁtable growth, as it allows us to continuously target High growth segments Services & Aftermarket New technologies Accelerate technology development Portfolio management GROWTH AREAS GROWTH ENABLERS Digitalize the full value chain Regionalized and competitive supply chain Operate more efﬁciently – closer to customers A DIFFERENT SKF 2030 Intelligent and clean growth the most attractive opportunities. Within these growth areas, strong market demand matches our ability to differentiate and provide customer value. This means that we are well positioned to accelerate proﬁtable growth. Read more on pages 14–17. 6 SKF Annual Report 2021 72% SHARE OF NET SALES 87% SHARE OF OPERATING PROFIT 1) SKF’S OFFERING MARKET DRIVERS MARKET CHARACTERISTICS SKF’S POSITION • A leading position in industries such as railway, heavy industries and industrial distribution market, and a prominent position in other industries. 0 6 18 12 202120202019 % Net sales and operating proﬁt 1) Net sales MSEK Operating margin 1) 0 20,000 60,000 40,000 1) Adjusted for items affecting comparability 2) Total value of accessible bearings market • Supplying more than 40 industries globally with products and services, both directly and indirectly through a network of more than 7,000 distributors. • Broad product range of bearings, seals and lubricationsystems. • Rotating shaft services and solutions for machine health assessment, reliability engineering and remanufacturing. • Reliable rotation is crucial for many industries. • Climate change and the actions to address it inﬂuence most of SKF’s customer industries. • Other drivers vary from application to application, e.g.low friction, low energy use, maintenance-free solutions and total cost of ownership. • Digitalization enables monitoring and predictive maintenance throughout the product life cycle. • Fragmented global industrial OEM (Original Equipment Manufacturer) market, but in some industries, e.g. renewable energy and railway, arelatively small number of OEMs account for alargepart of the market. • The distributor channel is also globally frag- mentedand varies from country to country. 275 – 295 MARKET VALUE 2) SEK BILLION 12% to 14% BEARINGS MARKET DEVELOPMENT 2021 MAIN COMPETITORS Schaefﬂer Group, Timken, NSK, NTN, Iljin, JTEKT, Rothe Erde, Wafangdian Bearing Group, Minebea Mitsumi and C&U. SKF OVERVIEW Industrial 7 SKF Annual Report 2021 28% SHARE OF NET SALES 13% SHARE OF OPERATING PROFIT 1) SKF’S OFFERING MARKET DRIVERS MARKET CHARACTERISTICS SKF’S POSITION • One of the leaders in e.g. the development of components for auto motive electriﬁcation and wheel-end solutions. • Strong position in application-driven powertrainsolutions. • Strong global position in the aftermarket withanextensive distribution network. Automotive 0 3 9 6 % 202120202019 MSEK Net sales Operating margin 1) 0 10,000 30,000 20,000 1) Adjusted for items affecting comparability 2) Total value of accessible bearings market • Customized bearings, seals and related products forwheel-end, driveline, e-powertrain, engine, suspension and steering applications to manufacturers of cars, light and heavy trucks, trailers, buses and two-wheelers. • Supplying the vehicle aftermarket with spare parts, both directly and indirectly through a network of morethan 10,000 distributors. • The light vehicle market: electriﬁcation, energy efﬁciency and reductionof emissions. • The truck market: total cost of ownership, connect ivity and integrated systems. • The aftermarket: changing buying patterns, newchannels, product performance and cost optimization. • Consolidated automotive OEM market with a small number of large companies. • Fragmented vehicle aftermarket. • OEM manufacturers account for about 80% of the total bearings market, while the independent vehicle aftermarket accounts for the remainder. 125 – 145 MARKET VALUE 2) SEK BILLION 5% to 7% BEARINGS MARKET DEVELOPMENT 2021 MAIN COMPETITORS Schaefﬂer Group, Timken, NSK, NTN, JTEKT, Iljin, C&U and Wanxiang Qianchao. 8 SKF Annual Report 2021 SKF OVERVIEW AUTOMOTIVE Meeting the tough demands of commercial vehicles In 2021, SKF introduced the Truck Hub Unit (THU) 2nd Generation on the commercial vehicle market in China. This is the most compact and lightweight wheel end bearing technology, and it has been developed to meet the tough demands of commercial vehicles and to match vehicle service life. Due to the compact design, there is no need for disassembling from the axleduring brake maintenance. This makes the THU 2nd Generation the most reliable wheel end bearing concept on the market. SKF REMANUFACTURING Reduced costs and carbon emissions with remanufacturing SKF has remanufactured more than 39,000 bearings, weighing more than 400 tonnes, for steelmaker Severstal over the last 10 years. Remanufacturing has helped the company reduce carbon emis- sions by more than 65 tonnes per year. In addition, the service-based partnership has helped Severstal to reduce costs and improve its equipment reliability. SKF RECONDOIL SKF’s oil regeneration service available in Mexico Molecular Oil Technology is licensed to operate with a RecondOil Double Separation Technology (DST) stand-alone unit from SKF. The DST system removes particulates from industrial oil, allowing it to be regenerated rather than replaced. This will improve the environmental performance and reduce costs for industrial end-users in Mexico. INDUSTRIAL Saving millions with preventive maintenance Preventive maintenance solutions from SKF enable the steelmaker company, Ovako, to identify problems early and ﬁx them immediately, thereby avoiding bearing failures and machine downtime. Constant monitoring equipment gen- erates more data. This has led to Ovako being able to see trends and patterns that can be acted on early. The savings in maintenance have amounted to around SEK 8 million per year. 9 SKF Annual Report 2021 Daria Naboichenko Business Services Project Manager, Moscow, Russia “At SKF you feel like your work is an extension of who you are. Together with my colleagues all over the world we con- sciously produce value.” Malonie Guha Global Quality Manager, Gothenburg, Sweden “As a department, we’re envi- sioned to be at the forefront ofinnovation. Powered by automation and modern tools, delivering future focused solutions is our main priority.” Jakub Duszczak Digital Deployment Champion, Poznan, Poland “I support our factories in their digitalization journey. Making sure they understand beneﬁts and challenges, and how to solve their pain points in the best possible way.” Renato Neves Global Manager, Head of Digital Eco systems & Partner ships, Gothenburg, Sweden “I enjoy my work the most when learning from my col- leagues. Applying this in real life and generating customer value motivates me a lot.” Maya Chaudhari Cleantech Director, Lansdale, USA “My role is to focus on Clean- tech, helping our customers reduce their environmental impact and to seize business opportunities for SKF that contribute towards addressing the climate change challenge.” Harshali Patil Operator in Maintenance Department, Pune, India “SKF’s strategy to focus on the future workforce by develop- ing and involving them in the journey of lean manufacturing and digitalization is critical to create a culture of innovation.” Jorge Yanez R2R Chief Accountant, Madrid, Spain “I joined SKF one year ago and I’m happy. I feel as part of a team with a lot of opportuni- ties to continue growing within the company in the future.” Yijun Zhu Sales Manager, EV & OEM Customers, Shanghai, China “SKF entitles employees to have self-decision power, which enables SKF’s leading position in cutting-edge tech- nology. A win-win situation for both SKF and employees.” We are SKF 10 SKF Annual Report 2021 PRESIDENT’S LETTER 11 SKF Annual Report 2021 “ Our broad knowledge and reach provide a great platform to drive proﬁtable growth” CEO Rickard Gustafson In 2021, we saw solid growth and improved margins. Now, we are focused on delivering on our ambitious plans, accelerating our journey to become an even more innovative, growth focused and proﬁtable industrial player. 12 SKF Annual Report 2021 PRESIDENT’S LETTER Personally, I’m also very pleased that we’ve recently announced two important milestones in our future work with regards to our own operations: achieving net zero emissions from our own operations by 2030 as well as achieving a netzero supply chain by 2050. We of course also continue tosupport the UN Global Compact initiative and its principles and the Global Goals for 2030.” How would you describe SKF’s development in2021? “I think it has really been about continuing to deliver on the things we said we would do. We’ve continued to invest in making our factories more automated, more digitalized. We’vealso continued the transformation of our engineering and manufacturing capability, putting more competence closerto our customers inboth Americas and Asia. The people I’ve met and stakeholders I’ve engaged with have really reinforced the strength of SKF: lead- ing technical capabilities, relentless customer focus and passionate people. How would you summarize your ﬁrst year as President and CEO of SKF? What are your impressions sofar? “For the business in general, it’s been a year with challenges, but also a lot of opportunities. We saw continued sharp rebound in post-pandemic demand within Industrial, but also exceptional pressures throughout the supply chain, logistics constraints and signiﬁcant cost inﬂation. The team really man- aged the situation in a good way, and we’ve been able to keep delivering to our customers. Automotive saw many of the same challenges, but also had to deal with the added uncertainty of large OEM customers cancelling orders with very short notice. On a personal level, it’s been a pleasure and joy getting to know this fantastic company. The people I’ve met and stake- holders I’ve engaged with have really reinforced the strength ofSKF: leading technical capabilities, relentless customer focusand passionate people. 13 SKF Annual Report 2021 Financially, 2021 was strong for us with solid growth and improved margins. Our operating margin was 13.3% and we delivered an organic sales growth of 13%. The performance in the ﬁrst half of the year was especially strong. Externally, two of our largest challenges have been supply chain constraints and sharp cost inﬂation during the second half of the year. Quite simply put, we could have delivered even more to our customers, had it not been for component short- ages and logistics bottle necks. On the cost inﬂation side of things, steel prices were the ﬁrst to move, followed by logistics and energy prices. We’ve worked hard to compensate but the increases were higher and sharper than I believe anyone could have predicted. We’ll continue to pull all available levers to compensate for the steep cost inﬂation.” What will be important for SKF to achieve in 2022? “Starting to deliver on the ambitious plans set out in our new strategic framework (see pages 14–17). Putting the enablers inplace and making sure that we really get the organization working in the way that we want it to. Our broad knowledge andreach provides a great platform to drive proﬁtable growth, which we are now going to accelerate.” In what ways are SKF’s products and solutions enabling amore sustainable industrial development? “By far, our largest contribution lies in what we can do with, and for, our customers. We offer products, solutions and services that help machines run smoother, with less emissions, as well as enabling the growth of clean technologies, such as renewable energy and electric vehicles. We will continue to invest more into the development of solutions for these indus- tries, growing hand in hand with our customers. We can also enable signiﬁcant energy and carbon savings for our customers by making our products lighter, more efﬁcient, longer lasting and repairable. Whether it’s about lubrication management, condition monitoring or bearing remanufactur- ing, our service offering is fundamentally about the removal of waste from customer processes and value chains. With a combination of these approaches, we have the poten- tial to make a profound contribution to the transition to a cleaner world, whilst driving innovation and growth for SKF.” In 2021 you launched a new target to have a net zero supply chain by 2050. How are you going to do it? “We have a proven track record in this ﬁeld and are conﬁdent that, by 2030, our own facilities will have net zero greenhouse gas emissions. This gives us the conviction that achieving a fully net zero supply chain by 2050 is possible. More challenging, butalso more exciting! Achiveing this will require focus and commitment from people not only within our own operations, but also from those working in other parts of the value chain. We’re in this together: colleagues, suppliers and customers. When it comes to steel which, by far, is the biggest source of scope 3 emissions for us, we’re already working with academia, suppliers and other stakeholders to speed up the development of fossil- free steel. Everyone in SKF is committed to this change. I’m convinced that together with our partners across the entire value chain, we have the determination needed to get it done.” How would you describe the difference that the employees make at SKF? “I think the proof lies in what we have achieved. 2021 was atough year, with lots of external factors working against us. Butthis didn’t deter us. So much hard work and commitment was shown across all parts of the business. People got the jobdone, using their passion and knowledge to serve and help our customers. They did this at the same time as they also needed to put extra care and attention towards taking care of themselves and their colleagues. For all of this, I’m extremely grateful and they deserve appreciation for all their efforts during 2021.” We have the potential to make a profound contribution to the transition to a cleaner world, whilst driving innovation and growth for SKF. 14 SKF Annual Report 2021 STRATEGY AND VALUE CREATION A strategic framework for accelerating proﬁtable growth Rickard Gustafson on the new strategicframework What are you looking forward to most in 2022? “I’m really looking forward to kicking off our work tobecome an even more innovative, growth focused and proﬁtable industrial player. We will accelerate proﬁtable growth by targeting segments and products where we can provide signiﬁcant value to our customers. This is a really exciting journey and one which will involve every single one of our colleagues around the world.” What will SKF look like in 2030? “A successful execution of our strategy will result in a different SKF than today. By 2030, we will strive to grow faster and double the business, at improved margins. We will be more focused and efﬁcient. We will be the technical partner of choice among our customers and lead the development of sustainable solutions.” How are you going to achieve this? “We have deﬁned a strategic framework based on two concepts: intelligent and clean. Intelligent means providing connected and tailored offerings for our customers, as well asusing tech- nology to make our operations more efﬁcient. Clean reﬂects our ability to enable a more sustainable industry, whilst running our own business in a transparent and responsible manner. These concepts will guide us as we embark on an exciting journey to become a more focused, innovative and proﬁtable industrial player.” When we say intelligent and clean growth Intelligent … • Customer offerings and solutions • Portfolio management • Digital value chain and processes • Capital allocation and resource deployment Clean … • Tech applications • Industries: minimize friction and waste • Value chain: net zero emissions and hightransparency • Business practice and high ethics 15 SKF Annual Report 2021 High growth segments Services & Aftermarket New technologies Accelerate technology development Portfolio management GROWTH AREAS GROWTH ENABLERS A DIFFERENT SKF 2030 Intelligent and clean growth Digitalize the full value chain Regionalized and competitive supply chain Operate more efﬁciently – closer to customers Double the business at improved margins More focused and efﬁcient Technical partner ofchoiceamong customers Leading development of sustainable solutions 16 SKF Annual Report 2021 STRATEGY AND VALUE CREATION Prioritized growth areas where weadd signiﬁcant customer value SKF has something that very few industrial companies have: a deep understanding of almost all industrial applications. Everywhere there is rotation, there is a good chance that SKF products, capabilities and skilled employees are providing value in the form of improved operational performance and reduced emissions. SKF’s ability to master the complexity of meeting customer needs across a wide range of industries and numerous geo- graphies, is our greatest strength and a key to our success. Ourbroad business reach gives us a platform to drive proﬁtable growth, as it allows us to continuously target the most attrac- tive opportunities. Key megatrends and increased investments in sustainability, digitalization, regionalization and electriﬁcation will also pro- vide proﬁtable growth opportunities for SKF. All in all, SKF is well positioned to accelerate proﬁtable growth by targeting opportunities where strong market demand matches our ability to differentiate and provide customer value. We will accelerate proﬁtable growth, with emphasis on: • Targeting industries with high growth potential, where SKF has a strong market position and competitive edge, e.g. high-speed machinery, electric drives, agriculture, wind, railway, food & beverage and robotics & automation. • Re-positioning the automotive business to proﬁtable and growing segments where SKF has the lead, including electric vehicles, commercial vehicles and aftermarket parts. • Developing offers for emerging industries such as hydrogen processing and carbon capture, where SKF is already well positioned through existing technologies such as magnetic bearings. • Strengthening the foundation for recurring revenues by simplifying our service offering, addressing a wider market. New technology and partnerships will provide scale and easy access to our data analysis and machine performance competence. Being selective in our investments also implies that we will deal with the parts of our business that are not generating sufﬁcient returns. Here, we will either improve the performance or trim them from the portfolio. “ Condition monitoring anddata collection will increase in the future. Our vision is to go towards a maintenance model where you change components only when needed and not based ona ﬁxed interval.” Kimmo Soini CEO, VR Fleetcare 17 SKF Annual Report 2021 Enablers to deliver on our growth agenda To deliver on our growth agenda, we have identiﬁed four main enablers: 1. Accelerate technology development Focus on developing technologies and solutions that help our customers improve their operations and reduce emissions. We will use insights from connected products to speed up development of new customer offerings and solutions. Over time, we plan to increase R&D expenditure by around 50%, helping us capture more growth opportunities. 2. Digitalize our full value chain Signiﬁcant progress has been made in digitalizing SKF’s manufacturing operations. As part of our journey to become even more relevant for our customers, investments will be made in connecting the value chain: customers, sales, logis- tics, manufacturing, supply chain and R&D. This to improve ease of doing business with us and enabling more intelligent decisions in our own operations. 3. Regionalized and competitive supply chain We will continue to increase our investments in property, plant and equipment, supporting our growth ambitions. Through these investments, regionalization in Asia will grow from around 60% to more than 85%, and for Americas from around 40% to around 60%, further improving our competi- tiveness and ability to capture proﬁtable growth. The increased investments will be funded by actions to improve our net working capital and continued cost reduc- tion. These efforts will be supported by a new operating structure and a more regionalized value chain. 4. Operate more efﬁciently – closer to customers SKF’s new operating model and organizational structure places end-to-end operational and ﬁnancial accountability as close to our customers as possible. • Four industrial regions Americas, EMEA, India & South- east Asia and China & Northeast Asia, further enhancing the ability of our largest and most proﬁtable businesses to serve customers with increased speed and responsiveness. • One global automotive business Creating the accounta- bility and transparency needed to improve proﬁtability and re-focus the portfolio. The increased autonomy will also, over time, provide enhanced strategic ﬂexibility. • Six independent and emerging businesses Seals, Lubri- cation, Aerospace, Marine, Magnetic Bearings, RecondOil, creating the focus needed for these to continue to develop proﬁtably and seek growth opportunities also beyond the rotating shaft. • In addition, a lean central function, providing global support. “ Sustainability is a paramount part of our strategy, also in our supply chain, and we areworking closely with our strategic partners, like SKF, to act on the challenge jointly.” Ville Rimpilä SVP Supply Chain and Global Operations, Kongsberg Maritime – Propulsion & Engines 18 SKF Annual Report 2021 STRATEGY AND VALUE CREATION 19 SKF Annual Report 2021 SKF has been working with solutions to climate issues for many years. We have a proven track record, and we are conﬁdent that we will succeed in reaching net zero greenhouse gas emissions in our production facilities. We already source or generate about half of the electricity we use from renewable sources. By 2030, this will be 100% in every location across the SKF world. In October, merely weeks before the UN Climate Change Conference in Glasgow, we launched another challenging goal. By 2050, our entire supply chain, from raw materials to the delivered products, will be net zero. Net zero is an ambitious goal and we’re approaching this task like we always do – with determination, competence and skills. All our targets will be aligned with the Science Based Targets initiative and cover all relevant greenhouse gases (GHG). SKF’s annual GHG emissions from scope 1, 2 and 3 (upstream) amounts to around 1.8 million tonnes of CO 2 e. In our upstream supply chain, steel is by far the biggest source of CO 2 emissions. Therefore, to go net zero, a massive change is needed in the current steel production process. Reaching a goal that not only involves our own operations but concerns the full value chain will require a strong commit- ment and determination from everyone who is a part of this chain. One approach is working with industry partners in initia- tives such as SteelZero and ResponsibleSteel, another is ensuring full traceability through the entire chain. Decarbonizing is in strong progress; all the way from our world-class manufacturing to the millions of bearings being used every day in machines and vehicles around the world. Decarbonizing in progress Accelerating the electric vehicle momentum. More on page 31. Accelerating the circular economy of oil. More on page 41. Accelerating the next industrial revolution. More on page 51. 20 SKF Annual Report 2021 STRATEGY AND VALUE CREATION Why invest in SKF An investment in SKF is an investment in intelligent and clean growth. Intelligent means providing connected and tailored offerings for our customers, as well as using technology to make our operations more efﬁcient. Clean reﬂects our ability to enable a more sustainable industry, as well as to running our own business in a transparent andresponsible manner. DIVESTED CAPITAL SINCE 2015, SEK 7. 2 billion SALES 2021, SEK 82 billion ADJUSTED OPERATING MARGIN 2021 13.3% • Optimization of the business portfolio. • Divestments of non-core assets. • Prioritizing customer focus. • From cyclical to non-cyclical, focusing on 40 global customer segments, and delivering stable margins regardless of the business climate. • From industrial heavyweight to agile cleantech. • To offer our customers new products and services andnew ways of working. 2021 was a strong year for us We have managed to adapt production to meet customer demands in one of the most challenging global supply chain constraints ever. In this dynamic environment, SKF still managed to deliver very strong growth and opera ting margin. Another hallmark of margin resilience. The changes made since 2015 … … have transformed the company ... … successfully put to the test inextraordinary times. 21 SKF Annual Report 2021 We will accelerate proﬁtable growth with an increased emphasis on: • Targeting existing industries with high growth potential. • Re-positioning the automotive business. • Developing offers for emerging industries such as hydrogen processing and carbon capture. • Strengthening the foundation for recurring revenues. • Delivering both economic and environmental value is key to SKF’s strategy. SKF will grow and gain market shares by offering superior value and making smart acquisitions. • SKF leads the way for circular business models, underlining the Group’s strong commitment to asustainable economy. • By creating and capturing customer value through the productivity of reliable rotation, SKF and customers strive towards the same goals –reducing costs, waste, risks, and environmental impacts. • Altogether, this will make SKF even stronger, aresilient high margin cleantech business. Successful execution of our strategy will result in a different SKF than today. By 2030, we will strive to: • Grow faster and double the business, at improved margins. • Be more focused and efﬁcient. • Be the technical partner of choice among our customers. • Lead the development of sustainable solutions. SKF’s ability to master the complexity of meeting customer needs across a wide range of industries and numerous geographies, is one of our greatest strengths and key to our success. Key megatrends and increasing investments in electriﬁcation, digitalization and regionalization provide growth opportunities for SKF, amplifying demand for our capabilities and offerings. All in all, SKF is well positioned to accelerate proﬁt- able growth by targeting opportunities where we see a strong market demand, matching our ability to differentiate and provide customer value. SKF in pole position to further scale intelligent and clean growth … … and we will now accelerate proﬁtable growth … … bringing higher shared value –to SKF, customers and the environment … … and make SKF a very different company in 2030. TARGE T OPERATING MARGIN 14.0% 22 SKF Annual Report 2021 STRATEGY AND VALUE CREATION Trends and drivers How SKF creates value Sustainability The climate change crises call for industries to adopt new and efﬁcient business models, which are less dependent on physical resources. SKF helps customers move towards a circular economy by providing products and solutions, condition monitoring, Rotation as a Service, and remanufacturing services. We are also reducing CO 2 emissions from our factories and supply chain. Electriﬁcation Electriﬁcation is a strong trend in many industries, especially in the automotive industry. Electric vehicles can bring many beneﬁts to societies, for example, energy security, urban air quality, greenhouse gas reductions and noise mitigation. SKF has a portfolio of innovative solutions that enable robust and efﬁcient E-powertrain drives where bearings are essential. Financial • Assets SEK 99.6 billion • New investments SEK 3.8 billion • R&D investments SEK 2.8 billion Social • Customers in 40 industries • More than 17,000 distributors • 42,602 employees • 700 application engineers • 2,200 service engineers Environmental • 1,772 GWh energy • 582,000 tonnes metal Physical • 87 manufacturing units • 15 technology centres • 29 industrial service centres • 16 REP centres • 13 remanufacturing centres Resources Digitalization Digital transformation affects all parts of the value chain. Shorter lead times, faster development cycles, smaller inventories and signiﬁcant opportunities for resource efﬁciency. SKF is investing in connecting the value chain to improve ease of doing business with us and enabling more intelligent decisions in our own operations. Regionalization With global trade under pressure, connectivity and information ﬂows rapidly increasing, and a continued shift in economic power, a region-for-region approach with manufacturing, sales and technical knowledge close to customers is needed. SKF continues to invest in auto- mation and regionalization of our manufacturing foot- print and product development to further improve our competitiveness and ability to capture proﬁtable growth. 23 SKF Annual Report 2021 Financial • Operating proﬁt SEK 10.8 billion • Cash ﬂow SEK 2.1 billion 1) • Corporate income taxes SEK 2.5 billion • Dividends SEK 3 billion • Reinvested in SKF SEK 4.4 billion 2) Social • Employee beneﬁt expenses SEK 24 billion 3) Environmental • CO 2 e reduction 12,000 tonnes (scope 1 and 2, 2021 v. 2020) • Revenues from cleantech industries SEK 6.8 billion Physical • 275 Registered invention disclosures • 246 First ﬁlings of patents Value created Customer value • Lower environmental impact • Safer operations • Higher productivity • Improved ﬁnancial performance SKF’s business model and strategy are designed to maximize value creation for our stakeholders. Every- where there is rotation, there is a good chance that our products, capabilities and skilled colleagues are providing value in the form of improved operational performance and reduced emissions. Through performance-based business models with incentives based on Key Performance Indicators such as uptime and productivity, the interests of SKF and our customers are aligned to reduce cost, waste, safety risk and environmental impact. Reducing cost and environmental impact Asset Supply chain 4.0 Remanu - facturing Application (re)engineering Data analytics & Machine learning Remote monitoring Lubrication management R e d u c e R e u s e R e c y c l e Redesign and improve More about SKF’s strategic framework on pages 14–17. 1) After investments before ﬁnancing. 2) Net proﬁt less proposed dividends. 3) Including social charges. 24 SKF Annual Report 2021 STRATEGY AND VALUE CREATION Operating margin 1) Revenue growth 2) Net debt 3) /equity WHY IS THIS IMPORTANT? Improved ﬂexibility, automation, and ﬁxed cost leverage. HOW TO REACH THE GOAL • Acceleration of footprint optimizations, automation and regionalization supported by newways of working. • Cost competitiveness. WHY IS THIS IMPORTANT? Faster than market growth. HOW TO REACH THE GOAL • Increasing value for customer, cost competitiveness. • New businesses: e.g. cleantech, RecondOil, electriﬁcation. • Select acquisitions. WHY IS THIS IMPORTANT? • Manage operations through economic cycles. • Flexibility to act. HOW TO REACH THE GOAL • Strong cash generation. 2021 TURN-OUT The operating margin was 13.3%, an increase of 1 percentage point compared to lastyear. Positive effects from higher sales and manufacturing volumes while currency and general cost inﬂation had a negative effect. 2021 TURN-OUT Organic sales increased by 13% compared to 2020. Strong customer demand across all geographies. Industrial sales grewby 12% and Automotive salesgrew by 14%. 2021 TURN-OUT Net debt/equity increased from 9% to 13% in 2021. Financial liabilities increased net by SEK 1 billion due to the issuance of a new EUR 300 million bond and the maturity of the EUR 200 million bond. Financial assets decreased by SEK 1 billion driven by low cash ﬂow. 8 4 0 12 16 20191817 21 5 0 –10 –5 10 15 20191817 21 20 10 0 30 40 50 20191817 21 12.2% 2017–2021 AVERAGE 3.18% 2017–2021 AVERAGE 19.8% 2017–2021 AVERAGE >14% TARGET >5% TARGET <40% TARGET 13.3% 2021 OUTCOME 12.6% 2021 OUTCOME 12.5% 2021 OUTCOME Long-term targets 1) Adjusted for items affecting comparability. 2) Including acquisitions, adjusted for divestments. 3) Excluding pension liabilities. SKF’s long-term targets shall be achieved over a business cycle. 25 SKF Annual Report 2021 ROCE 1) Dividend pay-out ratio Net zero by2030 4) WHY IS THIS IMPORTANT? Focus on capital efﬁciency as invest ments in competitiveness are accelerated. HOW TO REACH THE GOAL • Automation and increasing regionalization. • Working capital management. WHY IS THIS IMPORTANT? The dividend should reﬂect the earnings and cash ﬂow trends, while considering the Group’s development potential and ﬁnancial position. HOW TO REACH THE GOAL The ordinary dividend should amount to around one half of SKF’s average net proﬁt. WHY IS THIS IMPORTANT? • Need to act on climate change. • Reduces risk and increases- resilience in operations. HOW TO REACH THE GOAL • Process improvements • Energy efﬁcient machinery • Usage of renew able energy. 2021 TURN-OUT Return on capital employed increased to 14.9% in 2021. Capital employed was relatively unchanged while the Adjusted operating result increased by SEK1.6 billion. 2021 TURN-OUT The pay-out ratio in 2021 was 42%and the ﬁve-year average wasalso 42%. 2021 TURN-OUT A continued reduction in absolute total scope 1 and 2 CO 2 e emissions was achieved, keeping SKF on track for its net zero 2030 ambition. This result was delivered despite a sig- niﬁcant upturn in production activ- ity and has been achieved through improved energy efﬁciency and a signiﬁcant increase in the percent- age of renewable electricity use. 10 5 0 15 20 20191817 21 40 20 0 60 80 20191817 21 14.7% 2017–2021 AVERAGE 42% 2017–2021 AVERAGE >16% TARGET 50% TARGET 14.9% 2021 OUTCOME 42% 2021 OUTCOME 5) 4) In SKF’s own operations scope 1 and 2, versus 2015 base year. 5) According to the Board’s proposal for the year 2021. -20 -60 -100 20 19181716 20 24232221 25 29282726 30 –37% 2021 OU TCOME zero 2030 TARGET CO 2 26 SKF Annual Report 2021 STRATEGY AND VALUE CREATION For more information please visit skf.com/sustainability. 1) 2021 was reduced due to increased scope of reporting and is not comparable versus previous years. 2) More information on page 123. Climate targets Social target Raw material Goods transportation Bearing manufacturing Customer solutions Safety % of major energy intensive suppliers certiﬁed according to ISO50001. 42global suppliers in scope. WHY Raw materials have a signiﬁcant impact from alifecycle perspective. HOW Systematic energy management to reduce scope3 emissions from the supply chain. % CO 2 reduction (scope 3) per tonne of transported products compared to 2015. WHY Reduce emissions and at the same time improve cost efﬁciency. HOW Shorter transports, higher ﬁll rates and more CO 2 effective tran- sport modes. Accident rate per 200,000 worked hours. WHY Safety always comes ﬁrst and SKF is convinced thatallwork-related accidents can be prevented. HOW Global management system and focus on risk elimination and right safety behaviors. % CO 2 (scope 1 and 2) reduction per tonne of sold bearings. WHY Energy use and related emissions are among the most signiﬁcant ways that SKF can reduce its environmental impact. HOW Increased energy efﬁciency, increased share of renewable energy, consolidation of manufacturing footprint. Revenues from key areas such as renew able energy, electricvehicles, the recycling industry and remanufacturing. WHY Life cycle studies show that the greatest impact iswithin the use phase of SKF’s solutions. HOW Strategic focus on cleantech growth. 40 20 0 60 80 100 191817 20 21 –40 –20 –30 –10 0 20 10 30 191817 20 21 0.25 0 0.50 0.75 1.00 191817 20 21 –40 –60 –20 0 191817 20 21 4 2 0 6 8 SEKbn 1918 20 21 100% –40% TARGET –40% TARGET zero TARGET 56% 2021 OUTCOME 1) 24% 2021 OUTCOME 2) –50% 2021 OUTCOME 6.8 SEKbn 2021 OUTCOME 0.67 2021 OUTCOME Sustainability targets TARGET 27 SKF Annual Report 2021 Enabling circular economy through new technology Additive manufacturing will play an important role to support our customers’ future application needs. By acquiring the Belgian company Laser Cladding Venture n.v. (LCV) SKF has increased its additive manufacturing skills and capabilities. LCV is a niche engineering start-up specialized in various laser cladding technologies and processes which can be applied to support SKF’s service and remanufacturing offering. Laser cladding is one of several additive manu- facturing technologies and is used to create thin metallic coatings on metallic substrates. This technology works by mixing metal powder with inert gas in a laser beam, which melts the powder and welds it onto the surface. Laser cladding makes it possible to repair metal surfaces and to mix various types of metals for tailored surface layers. For example, the technol- ogy makes it possible to apply a stainless-steel coating, to prevent corrosion – a common cause of bearing failure in many applications. The tech- nology will also strengthen SKF’s ability to repair bearings and other products, enabling a more cir- cular use. By repairing a damaged surface with a new metallic layer, there is no need to replace the whole bearing. 28 SKF Annual Report 2021 STRATEGY AND VALUE CREATION SKF continually works to identify and understand the mate- rial issues and ﬁnd integrated ways to effectively manage them –creating and protecting customer, investor, and other stake- holder value as we do so. SKF Care is our sustainability framework and helps us to structure and communicate the various integrated ways in which we drive sustainability. Covering the business, environ- ment, employee, and community dimensions. It provides rules, principles, and guidance on how we shall act as a global corpo- ration over the short, medium, and long term. For decades, SKF Care has been the foundation of who we are, and it is reﬂected in the SKF Care framework with its four interdependent dimensions. Business Care Assuring customer focus, ﬁnancial performance, and shareholder returns – with the highest standards of ethical behaviour. Environmental Care Continually reducing the environmental impact from SKF’s operations, and those of suppliers and customers. Employee Care Ensuring a safe working environment and promoting health, personal development, and well-being ofemployees at SKF, as well as people in the supply chain. Community Care Making positive contributions to the communities in which SKF operates. Sustainability framework BeyondZero was ﬁrst launched in 2005 and describes our ambition to reduce negative environmental impacts from our own operations, and in our supply chain, while at the same timehelping our customers to improve their environmental performance through the products, solutions, and services weprovide to them, here below we describe the BeyondZero approach applied to climate change. As illustrated with several examples in this report, SKF hasa sharpened strategic focus on increasing revenues from solutions which reduce energy and material use, increase cir- cularity or enables clean technologies such as renewable energy and electriﬁcation. The growth of this part of the busi- ness, and the subsequent improvement in CO 2 performance, which it enables for our customers and society, represents the positive part of the BeyondZero approach. With this positive impact, in parallel to growing we aim to reduce and eventually eliminate the CO 2 emissions which occur as a result of our own operations and those inour extended upstream supply chain. For more information see page 19. As well as being an ethical prerequisite, sustainability presents SKF with a complex set of interrelated challenges and opportunities. There are many material sustainability issues for SKF and these range from environmental issues such as climate change and resource depletion to social issues such as human rights and employee wellbeing as well as economic and governance issues. 29 SKF Annual Report 2021 SKF Gothenburg SKF’s 3rd net zero factory From 2022, SKF’s manufacturing site in Gothenburg, Sweden has reached net zero status. This has been achieved through a num- ber of actions to optimize energy efﬁciency and, at the same time, switching to 100% renewable energy sources. Investments in heat recovery and efﬁciency have led to a lower overall energy demand and the factory now runs on 100% renewable electricity and used biogas instead of fossil based gas. Even the emissions associated with the in-factory transport of materials have been eliminated by switching to full electric vehicles that runs on renewable electricity. SKF in collaboration to speed up development of fossil-free bearing steel SKF is supporting the development of fossil- free bearing steel through a collaboration with Luleå University of Technology’s Center for Hydrogen Energy Systems Sweden (CH2ESS) initiative. Aspart of the collaboration, SKF will participate in and fund research within hydrogen use in industrial processes and energy systems, speeding up the development of fossil- free bearing steel. Research areas will include hybrid ceramic bearings, electric vehicles and other applications, andthe development and commer- cialization offossil- freebearing steel production. SKF’s expertise inﬂuid machinery, material science, production technology and IoT solutions will actively contribute to the work. Hydrogen is the key to a fossil-free energy system and CH2ESS is focusing on hydrogen useinindustrial processes and energy systems, in closecollaboration with Swedish industry. 30 SKF Annual Report 2021 STRATEGY AND VALUE CREATION 45% SKF has developed low-friction tapered roller bearings shown to reduce power losses by up to 45% compared with conven tional bearings. 50 million Industry analyst Bloomberg New Energy Finance expects sales to reach 8.5 million electric vehicles (EV) by 2025, and exceed 50 million before 2040. 500,000 km Manufacturers need reliable rotation for the design-life of the vehicle; around ten years or 300,000 km today, and up to 500,000 km or more in a near future. 31 SKF Annual Report 2021 Bearing solutions that meet electric traction motor require- ments, and ceramic hybrid Deep Groove Ball Bearings for high performance EV powertrains. Around the world, the electriﬁcation of passenger transport ispicking up momentum. As part of their commitments to theParis agreement on climate change, a growing number ofcountries are set to phase out the production of new com- bustion engine vehicles over the next two decades. This also means that the global automotive industry faces its most signiﬁcant transformation ever. SKF has been helping the automotive industry to meet different challenges since the beginning of the EV revolution. For EVs to work efﬁciently, the motors that drive them must run at very high speeds. This places enormous strain on the bearings they employ. We are developing designs for bearings –and their associated polymer cages and lubricants – that ensure they can withstand the higher speeds, acceleration, temperatures, and electric currents generated by these motors. Today, we are partnering with key OEM and Tier1 pioneers for the launch of full EVs, for example, by providing a complete package offering of bearings and seals featuring high speed, thin sections and electric current insulation options. Carmakers are set to launch around 450 new battery and plug-in-hybrid vehicle models over the next two years. We havethe technical, manufacturing and supply chain capabilities needed to support the sector’s accelerating growth. Our leading low friction solutions for EV motors, drivetrains, and wheel bearings are a key enabler to increased vehicle range, a tech- nology transformation towards a CO 2 neutral vehicle market. DECARBONIZING IN PROGRESS Accelerating the electric vehicle momentum As a long-term partner, SKF supplies GM with bearings for both E-drivetrains and chassis, including the world’s ﬁrst all- electric supertruck – Hummer EV. 32 SKF Annual Report 2021 SKF’S GLOBAL PRESENCE A leader on the world bearing market The global bearing market has an estimated value of between SEK 410 and 430 billion. SKF has become a world market leader by providing ﬁrst-class products and solutions for customers in 40 different industries across the globe. Like most global industries, SKF’s industry is exposed toﬁerce competition. We are a leader on the world bearing market, together with other major international companies including the Schaefﬂer group, Timken, NSK, NTN, and JTEK T. SKF estimates that the top six world bearing manufac- turers represent about 55% of the global rolling bearing market. The group of Chinese bearing companies, including smaller and larger ones, represents around 25%, with the main part of their sales in Asia. The remaining 20% includes many smaller regional and niche bearing competitors. The bearing market The global bearing market is generally deﬁned as the worldwide sales of rolling bearings, com- prising ball and roller bearing assemblies of various designs. SKF estimates that the global bearing market grew by 10 to 12% in 2021. The growth was mainly seen in the industrial market, but also in the automotive market. The global market growth is partly a recovery from the large decline in 2020, when it was heavily impacted by the pandemic. SKF was founded in 1907 and rapidly grew to become a global company. As early as the 1920s, we were well- established on all ﬁve continents. The trend in today’s global industry is towards fewer, larger and more international manufacturers and distribu- tors, meaning that global brands and products are ever more important. SKF is a trusted and well-known global industrial brand, which is a strong advantage in the bear- ing industry. To maintain competitiveness, we are focused on lever- aging global and regional economies of scale. The strate- gic direction is based on a region-for-region approach. Market value by customer industries 1) Global competition Market value by customer industries 1) Distribution business ~30% Industrial distribution and vehicle independent aftermarket. Automotive OEM ~30% Industrial original equipment bearing markets ~40% Including manufacturers of light and heavy industrial machines and equipment, as well as aerospace, off-highway and railway vehicles. 1) Total world demand of bearings 2021. 33 SKF Annual Report 2021 Asia’s share of the world bearing market has continued to grow rapidly and now accounts for around 55%, compared with less than 40% almost 20 years ago. Region Approximate share of the total world bearing market Market value, SEK billion 2021 market development Europe 20% of which Germany accounts for ~31% of the European market. 80–90 High growth North America 19% 75–85 High growth Asia and Paciﬁc 56% where China has a share of ~34% of the total world market. 220–240 High growth Latin America 2% of which Brazil accounts for ~50% of the latinamerican market. 8–12 High growth Middle East and Africa 3% 8–12 High growth Market value by region and growth 20212001 Latin America North America Europe Middle East and Africa Asia and Paciﬁc Market value by region and growth VALUE, SEK billion 410–430 34 SKF Annual Report 2021 SKF’S GLOBAL PRESENCE EUROPE NORTH AMERICA ASIA AND PACIFIC LATIN AMERICA MIDDLE EAST AND AFRICA The bearing market Population 748 million Urbanization 74% GDP growth 5.1% GDP/capita 35,557 USD Population 369 million Urbanization 83% GDP growth 5.6% GDP/capita 65,630 USD Population 4,497 million Urbanization 51% GDP growth 7.0 % GDP/capita 7,367 USD Population 654 million Urbanization 82% GDP growth 6.5% GDP/capita 9,312 USD Population 1,627 million Urbanization 49% GDP growth Middle East 3.0% Africa 3.4% GDP/capita Middle East 12,430 USD Africa 2,212 USD Western Europe dominates the region by size and still grows but at a slow pace. Eastern Europe has showed the highest growth. LARGEST MARKETS Germany, France, Italy Highly dependent on the U.S. market – the second largest bearing market in the world. Relies on key industries, e.g. light vehicles, off-highway and industrial distri bution. LARGEST MARKETS USA High growth market, driven by the devel- opment in China and India. The single most important market for electrical (China) and two- wheelers (India, Japan, Indonesia) segments, as well as for deep groove ball bearings demand. The highest global bearing demand for light vehi- cles, trucks, railway, lift and escalators. LARGEST MARKETS China, Japan, India Growth rates differ strongly between the countries. Brazil makes up more than 50% of regional demand. The depend- ency on the industrial and automotive after- market is large since there are few global OEMs present. LARGEST MARKETS Brazil, Argentina Recent decline is due to the sanctions imposed on Iran and a weaker development in Turkey. Turkey is the largest market with 1/3 of the total demand. The Mid- dle East and Africa each represent 1/3 of the region. Large depend- ency on industrial and automotive after- markets since there are few global OEMs. LARGEST MARKETS Turkey, South Africa MARKET CHARACTERISTICS Light vehicles, industrial distribution, vehicle aftermarket, industrial drives, renewable Light vehicles, industrial distribution, vehicle aftermarket, off-highway Light vehicles, industrial distribution, industrial drives, electrical Light vehicles, industrial distribution, vehicle aftermarket, heavy industries Industrial distribution, vehicle aftermarket, heavy industries, lightvehicles LARGEST CUSTOMER INDUSTRIES Source: United Nations, World Bank and IMF, World Economic Outlook October 2021 35 SKF Annual Report 2021 EUROPE 12,000 bearings to 1,500 rail carriages for 32 years In 2021, SKF signed an agreement with Stadler Rail to equip and service rolling stock for the Berlin underground (U-Bahn) in Germany. The service contract aims to help improve the reliability and uptime of trains on the U-Bahn. The 32-year contract includes several SKF solutions ranging from the design of new wheel set bearings to axle boxes and lubrication systems. The contract is cov- ered by a performance agreement, which is measured against a set of KPIs to ensure high customer conﬁdence. Under the agreement, SKF will service more than 600 rail carriages, which may be extended to a total of 1,500 carriages. The contract will involve the supply and servicing of more than 12,000 wheelset bearings, among other services. 36 SKF Annual Report 2021 SKF’S GLOBAL PRESENCE NORTH AMERICA SKF bearings help NASA collect samples on Mars NASA’s Mars Perseverance rover is collecting or handling rock and regolith samples during its multiple-year mission on the surface of the red planet. Kaydon Reali-Slim thin-section ball bearings are the key components from SKF that will ensure that those core operations in the harsh environment on Mars take place successfully. The bearings are designed and manufac- tured at SKF’s global, thin-section bearing engineering center in Muskegon, MI, and our recently expanded manufacturing hub in Sumter, SC. These highly engineered compo- nents ensure that the rover’s main robotic arm, sample collecting turret, tool bit carousel and sample handling assembly survive a months- long trip through space and function on the surface of Mars. ASIA & PACIFIC Powerful cooperation enables market leadership SKF and SF Holding, the largest integrated logistics service pro- vider in China, formed a strategic partnership to construct a green supply chain. Taking advantage of both companies’ strengths, the partnership will explore ecological cooperation to reduce waste and improve operation efﬁciency. SF provides SKF with smart supply chain and logistic services. With leading edge know-how on rotation equipment performance, we will contribute to SF’s oper- ating asset performance, such ascondition monitoring of Un- manned Aerial Vehicles, wheel- end solutions to avoid unplanned stops of vehicles and lubrication management to ensure logistic equipment efﬁciency. The cooper- ation will further contri bute to an upgrade of the supply chain eco- system. Courtesy NASA/JPL-Caltech 37 SKF Annual Report 2021 LATIN AMERICA Supporting clean energy production To avoid and eliminate potential failure on the bearings in a new wind turbine generator platform, WEG, the global electric-electronic equipment company, demanded a reliable technology. SKF offered a complete hardware solution, including condition monitoring through SKF REP Center and main shaft seals for all new wind turbines, to validate a new pitch bearing design to this platform. Together with local steel producers, we devoted more than a thousand engi- neering hours on the project. By inte- grating condition monitoring and sealing solutions, we reinforced our presence and proved to be a credible partner for the delivery of pitch bearings, condition monitoring and seals, supporting the production of clean energy. MIDDLE EAST & AFRICA Turnkey solutions improve uptime Housings support bearings and protect them from contaminants while keeping in lubricant. This helps maximize the performance, service life and cost- efﬁcient maintenance of the incorporated bearing. SKF was approached to assist with the design and supply of housing assemblies by one of the most important project houses in Africa servicing a gold mine in West Africa. We delivered a turnkey solution of bearings, housings with upgraded sealing arrangements and services. This improved the customer’s bearing and sealing arrangements resulting in extended mean- time between failure, as well as simpliﬁed and better controlled installation procedures. By delivering reconditioned housings, cost and environmental savings were achieved. 38 SKF Annual Report 2021 SKF’S GLOBAL PRESENCE 2021 2020 2019 2018 2017 2021 2020 2019 2018 2017 2021 2020 2019 2018 2017 2021 2020 2019 2018 2017 SKF in the markets EUROPE, MIDDLE EAST AND AFRICA NORTH AMERICA ASIA AND PACIFIC LATIN AMERICA 2021 33,603 MSEK Change +10.9% 2021 17,377 MSEK Change +1.3% 2021 25,416 MSEK Change +8.2% 2021 5,336 MSEK Change +9.2% Strong position inmost industry segments; industrial distribution, vehicle aftermarket, industrial drives, aero- space, renewable energy, off- highway. Strong position with a strong presence in most industry segments, espe- cially inindustrial distribu- tion, renewable energy, railway, heavy industries, trucks and two- wheelers. A leading position in the larger industry segments, especially in industrial distribution, renewable energy, heavy industries, off- highway, light vehicles, vehicle aftermarket and trucks. A leading position with strong presence in all industry segments, especially in industrial distribution, railway, off-highway, heavy industries. SKF’S POSITION NET SALES 41% 31%21% 7% SHARE OF GROUP NET SALES EMPLOYEES 1) 20,816 5,518 11,224 3,303 Men Women 30%70% 27%73% 22%78% 12%88% Men Women Men Women Men Women 47 16 21 3 MANUFACTURING UNITS 1) Average, full time employees. 39 SKF Annual Report 2021 • Several lubrication solutions introduced, for example, the launch of a customer self- service portal, to improve customer experience. • Commercialization of the sensor roller bearing offer, which gathers load data from wind turbines, under real conditions, to lower levelized cost of energy. • Innovation and integration ofhigh-end designed thin section ball bearings for Presezzi, a world wide leader for extrusion metal processing. EUROPE • General Motors names SKF Sup- plier of the Year for the ninth time. Hummer EV utilizes SKF hybrid ceramic wheel bearings, and a majority of the powertrain bearings. • By committing to quality and sustaina bility for customers, we are expanding our market share ofbearings in the US battery EV market at a rapid pace. • An SEK 935 million investment in North American manufacturing, technology, and engineering ex - pertise brings SKF closer to indus- trial and automotive customers, providing reduced lead times, lower transportation and logistics costs for a more efﬁcient supply chain. Together, this results in areduced carbon footprint. NORTH AMERICA • Accelerated competency build-up including online digitalized technol- ogies merging ofﬂine service to simplify interaction with distribu- tors, as well as production capacity and R&D footprint activities in Dalian and Xinchang. • Launch of newly innovated, high- speed and hybrid ceramic ball bearings forEVs to enable industry breakthrough in ever rising motor speed, while resolving currency leakage problems. • Accelerated REP business growth across Asia. RecondOil technologies installed in SKF factories and at customers. ASIA AND PACIFIC • Reduced CO 2 emissions through bearing remanufacturing and installation of solar panels in our new premises in South Africa. • Solutions within digitalization capabilities in industrial main- tenance increased uptime for Stevens Lumber Mills. • First railway bearings refurbish- ment center for SKF in Africa opened in South Africa. MIDDLE EAST AND AFRICA Important activities 2021 • 3.7 million bearings monitored and 15,000 wireless sensors connected to SKF REP Center. Strong demand from customers aligned with their Industry 4.0 journey. • Introduction of RecondOil business across countries and industries as an innovational and environmental business with contracts running at customers in chemical, pulp and paper and mining. • More than 300 tons of bearings remanufactured, thus saving more than 500 tons of CO 2 and13 million liters of water. LATIN AMERICA • Investment in bearing reman- ufacturing service at the SKF Competence Service Center in Turkey supporting customers in carbon footprint reduction, performance optimization and cost reductions. 40 SKF Annual Report 2021 SKF’S GLOBAL PRESENCE 3 tonnes SKF’s early stage life-cycle assessments estimate that every tonne of reused oil can reduce CO 2 e emissions by up to 3tonnes. 19 million tonnes An estimated 19 million tonnes of industrial lubricants are used globally every year. 57 million tonnes Based on the industrial life-cycle assessment, reusing all the industrial oil could potentially reduce CO 2 e-emissions byaround 57 million tonnes per year. 41 SKF Annual Report 2021 In 2019, SKF added a clean and smart technology that strengthens our decarbonization efforts. Under the brand name, SKF RecondOil, SKF delivers an innovation to turn the environ- mentally harmful use of industrial oil into an asset thatcan be used repeatedly with maintained performance. When machines break down it is usually because of dirt. With SKF RecondOil we can purify oil down to a nano level while retaining all the original properties. No downtime, and a cleaner and safer production environment. The same oil can be regene- rated over and over again – a truly circular economy of oil. SKF RecondOil is changing the business model for the use of industrial oils. As well as reducing customers’ environmental footprint, our performance-based contracts reduce customers’ total oil related costs. Up to 40% of maintenance costs are lubricant related. The downtime associated with replacing oil –and disposing of it – is expensive and unsustainable. SKF RecondOil enables a ﬁnancially and environmentally sound lubrication management with multiple beneﬁts. After tremendous improvement on KPIs at our production sites in Italy, the global roll-out across SKF’s world-class man- ufacturing sites is progressing rapidly. With such showcases, we are also making the technology available to customers around the world – both as part of its offer around the rotating shaft, as well as via licensed partners in selected markets. DECARBONIZING IN PROGRESS Accelerating the circulareconomy of oil No more oil changes, saving 10cubic metres per year and increasing productivity by 25% (Zapp Precision Metals, Sweden). RecondOil increases bearing performance in terms of noise and vibration, critical para- meters for food processing applications (Cassino, Italy). 42 SKF Annual Report 2021 RISK MANAGEMENT Risk management Main risks Trend Mitigation Information Security Increasing cyber security threats. Increasing require- ments from customers and governments to adhere to information security standards such as ISO, NIST and ITAR. Continuously measure and evaluate effective ness of protec- tion mechanisms and invest in new solutions to meet the changes in threat landscape. Strengthen the information security awareness and continue to implement controls according to SKF’s Information Security Management System (ISMS). Digitalization Increasing demands for afully connected value chain and excellent digital customer experience placing high demands on the speed of the digital transformation. Strategic initiatives in place to ramp-up digitaliz ation including strengthening capabilities, investing in digital talents, moderniz ing, harmonizing and simplifying theITlandscape. New product technologies Introduction of disruptive and quickly changing new technologies. Acquisitions and partnerships to help SKF make step changes in new technology areas. Establish aprocess to systematically look for new opportunities. Aftermarket disruption New online channels disrupting existing channels to the after market. Maintain existing channels to market, and at the same timework strategically with new digital channels. Give the SKF channel partners a competitive advantage through online tools. Ensure leadership across full SKF value chain and focus on application speciﬁc offers which bring differ- entiation/uniqueness making it harder for digital channels to take market shares from SKF. The SKF Group operates in many different industries and geographical areas. A general economic downturn on a global level, for exampel caused by a pandemic, or in one of the world’s leading economies, could reduce the demand for the Group’s products, solutions and services. Terrorism and other hostilities, natural disasters and disturbances in worldwide financial markets, could also have a negative effect on the demand for the Group’s products and services. There are also regulatory requirements, taxes, tariffs and other trade barriers, price or exchange controls or other governmental policies that could limit the SKF Group’s operations. SKF applies an integrated approach to risk management and has implemented an enterprise risk management (ERM) pro- cess that covers all parts of the Group. The risk impact includes impact on strategy, long term ﬁnancial performance, as well asbrand and reputation. The enterprise risk and opportunity management process is illustrated below. The risks highlighted below and on next page are the main risks identiﬁed during the 2021 Group ERM process. The main areas of opportunity are described on page 22. As with other risks, SKF applies an integrated approach to the identiﬁcation and management of risks related to sustaina- bility. The table on page 44 provides a summary of the main sustainability risks and SKF’s approach to managing them. For information about ﬁnancial risks including currency risks, interest risks, liquidity risks and credit risks, see Note 26 on pages 90–93. For Information about ongoing compliance related investi- gations, see Note 19 on pages 82–83. 43 SKF Annual Report 2021 Main risks Trend Mitigation Workforce There is a ﬁerce competition in the labor market, where the success of companies are dependent on the ability to attract, develop and retain critical competences and capabilities for the future. SKF takes a holistic approach in strengthening the Group as the employer of choice, by putting the employee experi- ence at the center. Employee engagement, leadership, competence and way of working are all key building blocks in this area. Business interruption Demand chain interruption. Implement a sourcing strategy with reduced single sourcing and regionalized supplier base. Implement a systematic process to manage supply chain disruption situations. Modernize, harmonize and simplify the IT landscape to reduce risk of system failure. Global/regional crisis Sanctions, tariffs and other trade barriers. Climate change, pandemics, war andother major events. Regionalize SKF’s manufacturing footprint and supplier base. Focus on business that will beneﬁt on the increased climate focus. Compliance The compliance risks include illegal cooperation and information exchange between competitors and anti- trust risks in the distribution business. Policies and instructions combined with manage ment commit ment and a strong tone from the top. Employee training, audits and the SKF Ethics & Compliance Reporting Line. Thisis valid for all compliance areas. The result is shared yearly with Group Management and the Audit Committee. There is also a half-year internal assessment to monitor changes and make sure mitigation actions are in place and delivering expected result which is presented to Group Management. Risk and opportunity assessments Group Management review Risk and opportunity consolidation Audit Committee SKF strategy development & execution Risk owners Annual Report Assessments are made by the business areas and Group support functions. Group Risk Manager receives and consolidates the assessments. Group Management reviews the consolidated assessment. The consolidated risk assessment is shared with the Audit Committee. The risk assessments are used as input to strategy development and execu- tion on Group level. Risk owners manage risk mitigation and follow-up. A high level overview isshared externally in the Annual Report. SKF Group ERM process 44 SKF Annual Report 2021 RISK MANAGEMENT Sustainability risks Trend Mitigation A major incident at an SKF facility causing environmental damage leading to ﬁnes and loss of reputation. SKF's Environmental management systems, certiﬁed to ISO14001, work to assure that all such material risks areidentiﬁed and that effective countermeasures are implemented to mitigate them. Water scarcity in the supply chain or at SKF facilities leads to reduced production. SKF facilities which are in areas of water scarcity are required to drive strong water reduction programs. SKFrequires that suppliers follow environmental norms and implement certiﬁed management systems. Extreme weather events. Requirements for emergency response plans at all sites include ﬂood risks etc. For more information, see SKF TCFD report available at skf.com/ar2021. Increased energy and other environmental costs due to legislation. SKF focuses on energy efﬁciency at its own facilities and suppliers - reducing energy demand and therefore related risks. For more information, see SKF TCFD report available at skf.com/ar2021. SKF employees or employees working in the supply chain, are hurt or killed by an accident at work. SKF's Health and Safety management system is certiﬁed to ISO 45001. The Group’s zero accident program, supported by proactive near miss reporting, aims to avoid all work- place accidents. Within the code of conduct for suppliers, SKF has deﬁned speciﬁc requirements for the assurance of health and safety for the employees of suppliers and sub suppliers. A person or persons are hurt or injured because of SKFproduct failure, malfunction or defect. SKF follows strict design and validation rules for all prod- ucts, and fully adheres to industry speciﬁc requirements for safety critical applications. SKF provides detailed instruc- tion on the correct use, ﬁtting and application of products. SKF's overall approach to quality management assures product conformity and performance to the highest level. Human rights of employees working at SKF or within the supply chain are not respected. SKF adheres to international standards and guidelines andenforces the SKF Code of Conduct policy in all its operations. Periodic Code of Conduct compliance audits areperformed and a whistleblowing process is available atlocal and global levels. SKF employees act in a fraudulent or corrupt manner leading to ﬁnancial penalties and reputation damage. SKF takes a proactive approach to assure awareness of demanded ethical standards, including anti-corruption, antifraud and antitrust. The work to follow up adherence is facilitated by the whistleblower function and a risk and incident based audit system. 45 SKF Annual Report 2021 46 SKF Annual Report 2021 THE SKF SHARE The SKF share SKF’s A and B shares are listed on the NASDAQ Stockholm, Large Cap stock exchange and are included in several indexes. In 2021, the share price increased by 2.5% for the SKF A share and 0.14% for the SKF B share. The total number of SKF shares traded on Nasdaq Stockholm was 392,339,062. SKF’s B shares are also traded on Bats CXE, Bats BXE and Turquoise. The total number of shares traded on these three marketplaces combined in 2021 was 98,095,339. SKF’s American Depositary Receipts (ADRs) are traded on the OTC market. Share conversion Owners of A shares have an option to convert these to B shares. In 2021, 867,122 shares were converted. As of 31 December 2021, A shares were 6.7% (6.9) of the total number ofshares. Dividend and total return The Board of Directors proposes to the Annual General Meeting that a dividend of SEK 7.00 per share be paid for 2021. The total return from investing in the SKF A share over the past three years was 82.1% and for the SKF B share 77.8%. Ownership structure SKF had 69,453 shareholders on 31 December 2021. Around 52.4% of the share capital was owned by foreign investors, around 37.1% by Swedish companies, institutions and mutual funds and around 8.2% by private Swedish investors. Most of the shares owned by foreign investors are registered through trustees, which means that the actual shareholders are not ofﬁcially registered. FAM AB, which is wholly owned by Wallenberg Investments AB, in its turn owned by the three largest Wallenberg Founda- tions, is the only shareholder with a shareholding representing more than 10% of the voting rights in SKF. Information to shareholders Financial reports and further information about the share canbe found at skf.com/investors. A list of analysts following SKF and the opportunity to subscribe to information from SKFis also available on the website. Sustainability indexes Based on the 2021 submission, SKF has been rated B within the Carbon Disclosure Project rating system which signiﬁes that the company is taking coordinated action on climate issues. SKF is also evaluated as Platinum (in the top 1% of companies in its sector) via the EcoVadis supplier sustainability evaluation platform which is used by many of the Group’s global customers to understand supplier sustainability performance. Additional information There are no regulations under Swedish law or under the Articles of Association limiting the transferability of SKF shares. Furthermore, to the best of SKF’s knowledge, no agreements exist between shareholders limiting the right totransfer SKF shares (e.g. by pre-emption or ﬁrst refusal clauses). No restrictions exist limiting the number of votes thateach shareholder may cast at a shareholders’ meeting. There are no existing agreements between SKF and any Boardmember or employee, allowing them to receive compensation in the event of resignation, dismissal without cause, or termination of employment as a consequence of apublic takeover bid for the shares in AB SKF. 47 SKF Annual Report 2021 50 100 150 200 202120202019 0 25 50 75 Million 100 B share Nasdaq Stockholm_PI (normalized against the B share) A share Number of A shares traded, millionNumber of A shares traded, million Number of B shares traded, million 250 SEK 100 150 200 250 % 300 100 150 200 250 Jan 2019 Jan 2020 Jan 2021 Dec 2021 Total return 2019−2021 SKF B share (SEK) SKF B Total return (%) 300 SEK Data per share SEK per share unless otherwise stated 2021 2020 Earnings per share 16.10 9.44 Dividend per A and B share 7.0 0 1) 6.50 Total dividends, MSEK 3,188 1) 2,960 Purchase price of B shares at year-end on NASDAQ Stockholm 214.50 213.40 Equity per share 96 75 Yield (B), % 3.3 1) 3.0 P/E ratio, B (share price/earnings per share) 13.3 22.6 Cash ﬂow from operations, per share 11.5 18.2 Cash ﬂow, after investments before ﬁnancing, per share 4.6 11.6 1) According to the Board’s proposal for the year 2021. The ten largest shareholders sorted by voting rights Number of shares Share capital, % Voting rights, % FAM AB 63,749,150 14.0 29.3 Harris Associates 23,039,843 5.1 3.2 Swedbank Robur Fonder 15,502,350 3.4 2.1 BlackRock 13,868,126 3.0 1.9 Vanguard 11,604,257 2.5 1.6 Handelsbanken Fonder 10,125,631 2.2 1.4 ODDO BHF Asset Management 9,805,977 2.2 1.3 Didner & Gerge Fonder 9,688,538 2.1 1.3 Invesco 8,673,181 1.9 1.2 Norges Bank 7,395,190 1.6 1.0 Source: Monitor, Modular Finance as of 31 December 2021. Geographic ownership 2021 Others, 7.8% Anonymous, 12.5% Europe excl Sweden, 9.1% USA, 23.0% Sweden, 47.6% Share development 2019–2021 48 SKF Annual Report 2021 Introduction The Board of Directors of AB SKF has decided to submit the following principles of remuneration for SKF’s Group Manage- ment to the Annual General Meeting. Group Management is deﬁned as the President and the other members of the management team. The principles shall apply to remuneration agreed and amendments to remuneration already agreed, after the adoption of the principles by the Annual General Meeting 2022, and, in other cases, to the extent permitted under exist- ing agreements. The objective of the principles is to ensure that the SKF Group can attract and retain the best people in order to con- tribute to the SKF Group’s mission and business strategy, its long-term interests and sustainability. Remuneration for Group Management shall be based on market competitive conditions and at the same time support the shareholders’ bestinterests. Variable salary covered by the principles shall belinked to predetermined and measurable criteria, aiming topromote the SKF Group’s business strategy and long-term interests, including its sustainability. For further information on SKF Group’s strategy, please refer to skf.com and the AnnualReport. Since 2008 SKF’s Annual General Meeting has resolved each year upon a performance share programme for senior manag- ers and key employees. Each year, the Board of Directors will evaluate if SKF’s Performance Share Programme, which includes Group Management, shall be proposed to the Annual General Meeting. Remuneration resolved by the Annual Gen- eral Meeting is excluded from the principles. SKF Performance Share Programme shall have the aim to continue to link the long-term interests of the participants and the shareholders. The performance criteria used to assess the outcome of the proposed performance share programme shall be linked to the business strategy and thereby to SKF Group’s long-term value creation, including its sustainability. For further information onsaid performance share programme, including the criteria which the outcome depends on, please refer to the Board of Directors’ proposal on SKF’s Performance Share Programme. Types of remuneration The total remuneration package for a Group Management member shall consist of the following components: ﬁxed salary,variable salary, pension beneﬁts, conditions for notice of termination and severance pay, and other beneﬁts such as acompany car. The components shall create a well-balanced remuneration reﬂecting individual performance and respon- sibility aswell as the SKF Group’s overall performance. TheAnnual General Meeting may also – irrespective of the prin ciples –resolve on other remuneration components, e.g.SKF’s Perfor mance Share Programme. Fixed salary The ﬁxed salary of a Group Management member shall be at amarket competitive level. It shall be based on competence, responsibility, experience and performance. The SKF Group shall use an internationally well-recognized evaluation system, in order to evaluate the scope and responsibility of the position. Market benchmarks shall be conducted on a yearly basis. The performance of Group Management members shall be continu- ously monitored during the year and shall be used as a basis for annual reviews of ﬁxed salaries. Variable salary The variable salary of a Group Management member shall runaccording to a performance-based programme. The pur- pose of the programme shall be to motivate and compensate value- creating achievements in order to support operational, ﬁnancial and sustainability targets and thereby promote the SKF Group’s business strategy, sustainability and long-term interests. The performance-based programme shall have predeter- mined and measurable criteria which can be both ﬁnancial and non-ﬁnancial and which contribute to the company’s long-term and sustainable development. The criteria shall primarily be based on the annual ﬁnancial performance of the SKF Group, such as ﬁnancial result, growth and capital efﬁciency and shall promote sustainability targets of the SKF Group. The satisfaction of criteria for awarding variable salary shall be measured over a period of one year. To which extent the criteria for awarding variable salary has been satisﬁed shall be determined when the measurement period has ended. The Board of Directors is responsible for the evaluation so far as it concerns variable salary to the President. For variable salary toother executives, the President is responsible for the evalua- tion. For ﬁnancial targets, the evaluation shall be based on ﬁnancial information made public by the SKF Group. Variable salary shall qualify for pension beneﬁts to the extent required by mandatory collective agreement provisions. The maximum variable salary shall vary between 50 to 70 percent of the accu- mulated annual ﬁxed salary of Group Management members. The Board of Directors’ proposal for a resolution on principles of remuneration for Group Management 49 SKF Annual Report 2021 Other beneﬁts The SKF Group may provide other beneﬁts to Group Manage- ment members in accordance with local practice. Other bene- ﬁts can for instance be a company car or health and medical insurance. Premiums and other costs relating to such beneﬁts shall depend on and follow local conditions and local practice but shall represent, as a general rule, a limited value and may amount to not more than 10 per cent of the accumulated annual ﬁxed salary of the members of Group Management. Pension The SKF Group shall strive to establish pension plans based on deﬁned contribution models, which means that a premium is paid amounting to a certain percentage of the employee’s annual salary. The commitment in these cases is limited to thepayment of an agreed premium to an insurance company offering pension insurance. A Group Management member shall normally be covered by, in addition to the basic pension (for Swedish members usually the ITP pension plan), a supplementary deﬁned contribution pension plan. By offering this supplementary deﬁned contribu- tion plan, it is ensured that Group Management members are entitled to earn pension beneﬁts based on the ﬁxed annual sal- ary above the level of the basic pension. The normal retirement age for Group Management members shall be 65 years. For employments governed by rules other than Swedish, pension beneﬁts and other beneﬁts may be duly adjusted for compliance with mandatory rules or established local practice, taking into account, to the extent possible, the overall purpose of the prin- ciples. For employments governed by Swedish rules, the pre- mium for the supplementary pension plan shall be linked to age and amount to a maximum of 40 percent of the accumulated annual ﬁxed salary not covered by any other pension plan. Notice of termination and severance pay A Group Management member may terminate his/her employ- ment by giving six months notice. In the event of termination ofemployment at the request of the company, employment shall cease immediately. The Group Management member shall however receive a severance payment related to the number ofyears service, provided that it shall always be maximized to two years ﬁxed salary. Salary and terms of employment for employees When preparing the principles, the Board of Directors has paidregard to the salary and terms of employment of the employees of the company. Information about employees’ total remuneration, the components of the remuneration and the growth and growth rate over time have been part of the basis for the Board of Director’s and the Remuneration Committee’s evaluation of the fairness of the principles of remuneration andthe limitations which the principles entail. The decision-making process to determine, review and implement the principles The Board of Directors has established a Remuneration Com- mittee. The Committee consists of a maximum of four Board members. The Remuneration Committee prepares all matters relating to the principles of remuneration for Group Manage- ment, as well as the terms of employment for the President. The principles of remuneration for Group Management are presented by the Remuneration Committee to the Board of Directors that, at least every fourth year, submits a proposal for such principles to the Annual General Meeting for approval. The principles of remuneration shall be valid until new principles have been adopted by the Annual General Meeting. The Board of Directors must approve the terms of employment for the President. The Remuneration Committee shall also monitor and evaluate programmes for variable remuneration for Group Management, the application of the principles of remuneration for Group Management and applicable remuneration structures and levels of the SKF Group. The members of the Remuneration Committee are indepen- dent of the SKF Group and Group Management. The President and other members of Group Management shall not be present when the Board of Directors processes and resolves on remu- ner ation related matters in so far as they are affected by such matters. The Board of Directors’ right to derogate from the principles of remuneration The Board of Directors may derogate from the principles of remuneration decided by the Annual General Meeting, in whole or in part, if in a speciﬁc case there is special cause for the der- ogation and a derogation is necessary to serve the SKF Group’s long-term interests, including its sustainability, or to ensure the SKF Group’s ﬁnancial viability. As set out above, the Remu- neration Committee’s tasks include preparing the Board of Directors’ resolutions in remuneration related matters. This includes any resolutions to derogate from the guidelines. Description of material changes to the principles and howthe views of shareholders’ have been taken into consideration The principles of remuneration are substantially similar to the previous version with a clariﬁcation of the criteria for variable salary. For the variable salary, examples of ﬁnancial para meters have been revised from TVA, cash ﬂow and individual goals to ﬁnancial result, growth and capital efﬁciency. Furthermore, acriterion promoting the SKF Group’s sustainability targets, which can be independent of the ﬁnancial performance of the SKF Group, have been added. The shareholders have not ex - pressed any speciﬁc views on the principles of remuneration. The Board of Directors considers the revisions, with clear cri- teria for variable salary and further promotion of sustainability targets, to reﬂect the general interest of the shareholders. 50 SKF Annual Report 2021 17 million An estimated 17 million bearings per year aremounted incorrectly. If only half ofthese were avoided, we could make sub- stantial reductions in carbon emissions. 100% renewable To build strong networks, SKF joined RE100 (Renewable energy 100) – a global initiative bringing together some of the world’s most inﬂuential businesses committed to using 100% renewable electricity. 51 SKF Annual Report 2021 To remain a leader in the bearing business, we need world- class customer service. In fact, that is our aim with world-class manufacturing: products developed, produced and delivered exactly according to what, when, how and where the customer needs them. This is a journey we started more than seven years ago and one that we will keep pursuing with continuous step-ups. The ambition is to have a fast, ﬂexible, cost-efﬁcient and fully con- nected organization close to our customers. By 2025, we will have fewer, but automated, factories, with higher ﬂexibility and an increased proportion of region-for-region manufacturing. So far, we have invested SEK 9.5 billion, in a total of 112 on - going and approved projects. By 2025 the estimated business beneﬁts are expected to reach SEK 5 billion. In 2020, we announced our commitment for our sites to become net zero in 2030. Having made significant decarbon- izing progress with the introduction of SKF RecondOil system, remanufacturing technologies and digitalization, the entire manufacturing ﬂow at our world-class manufacturing sites is now fully automated, offering precise adjustments. The strategic decision to pursue ever more demanding climate targets, such as net zero supply chain by 2050, is valuable in SKF’s customer relations. Today, an ever increasing number of customers demand products and solutions with a low carbon footprint. Ensuring traceability throughout the entire value chain is therefore the next big challenge. As we see it, this is the next industrial revolution, Industry 5.0, relying on full digitalization. DECARBONIZING IN PROGRESS Accelerating the next industrial revolution Less carbon emissions with technology step-up. Less waste with remanufactur- ing technologies. 52 SKF Annual Report 2021 Nomination of Board members and notice of Annual General Meeting Capital structure, ﬁnancing, credit rating and dividend policy In addition to specially appointed members and deputies, thecompany’s Board of Directors shall according to the ArticlesofAssociation, comprise a minimum ofﬁveand a maximum of twelve members, with a maximum ofﬁve deputies. The Annual General Meeting shall, inter alia, determine the number of Board members and deputy Board members, and preside over the elections of Board members and deputy Board members. Capital structure The capital structure target is a gearing of around 50%, corre- sponding to an equity/assets ratio of around 35% or a net debt/ equity ratio, excluding pension liabilities, below 40%. This underpins the Group’s ﬁnancial ﬂexibility and its ability to continue investing in its business, while maintaining a strong credit rating. On 31 December 2021, the gearing was 40.5% (48.0), the equity/assets ratio 45.5% (39.4) and the net debt/ equity ratio, excluding pension liabilities 12.5% (9.3). Financing SKF’s policy is to have long-term ﬁnancing of its operations. As of 31 December 2021, the average maturity of SKF’s loans was ﬁve years. SKF has four notes issued on the European bond market. EUR 296 million per 2022, EUR 300 million per 2025, EUR 300 million per 2029, and one with an outstanding amount of EUR 300 million, due 2031. In addition to these notes, SKF also has two notes issued on the Swedish bond market, due 2024 and in a total of SEK 3,000 million. According to the conditions of the notes, the notes’ interest rate may increase by 5% in case of a change of control of the company in combination with a rating downgrade to a non- investment grade as a consequence of this. Change of control meaning any party/concerted parties acquiring more than 50%of SKF’s share capital or SKF’s shares carrying more than 50% of the voting rights. Since SKF has relatively standardized loan documentation similar conditions also apply to other loan agreements. In addi- tion to the bonds mentioned above, SKF also has one bilateral loan of USD 100 million due in 2027. In addition to its own liquidity, AB SKF has two unutilized committed credit facilities, one of EUR 500 million with a due date in 2025 and one of EUR250 million with a due date in 2022. Notice to attend an Annual General Meeting and notice to attend an Extra General Meeting where an issue relating to a change in the Articles of Association will be dealt with, shall be issued no earlier than six weeks and no later than four weeks prior to the General Meeting. Notice to attend an Extra General Meeting for other matters, shall be issued noearlier than six weeks and nolater than three weeks prior tothe General Meeting. Credit rating On 31 December 2021, the Group had a Baa1 rating from Moody’s Investors Service and a BBB+ rating from Fitch Ratings, both with a stable outlook. SKF intends to keep a strong credit rating, which is reﬂected in its capital structure targets. Dividend SKF’s dividend and distribution policy is based on the principle that the total dividend should be adapted to the trend for earnings and cash ﬂow, while considering the Group’s develop- ment potential and ﬁnancial position. The Board of Directors’ view isthat the ordinary dividend pay-out ratio should amount to around onehalf of SKF’s average net proﬁt calculated over abusiness cycle, which is reﬂected in SKF’s long-term ﬁnancial targets. If the ﬁnancial position of the SKF Group exceeds the targets for the capital structure an additional distribution to the ordinary dividend could be made in the form of a higher dividend, a redemption scheme or a repurchase of the compa- ny’s own shares. On the other hand, in periods of more un - certainty a lower dividend ratio could be appropriate. Based on the operating performance, cash generation capacity and outlook, the Board has decided to propose to the Annual General Meeting a dividend of SEK 7.00 (6.50) per share. This proposal is subject to a resolution by the Annual General Meeting in March 2022, see page 105, Proposed distribution of surplus. 53 SKF Annual Report 2021 FINANCIAL STATEMENTS OF THE PARENT COMPANY Parent Company income statements and statements of comprehensive income ................................................... 94 Parent Company balance sheets ............................................................ 95 Parent Company statements of cash ﬂow ............................................ 96 Parent Company statements of changes in equity ............................. 97 NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY Note 1 Accounting policies ................................................................ 98 Note 2 Revenues and operating expenses ..................................... 98 Note 3 Financial income and ﬁnancial expenses .......................... 98 Note 4 Appropriations ........................................................................ 98 Note 5 Taxes ......................................................................................... 99 Note 6 Intangible assets .................................................................... 99 Note 7 Property plant and equipment .......................................... 100 Note 8 Investments in subsidiaries ............................................... 100 Note 9 Investments in equity securities ....................................... 103 Note 10 Provisions for post-employment beneﬁts ...................... 103 Note 11 Loans....................................................................................... 104 Note 12 Salaries, wages, other remunerations, average number of employees and men and women in Management and Board .......................... 104 Note 13 Contingent liabilities ............................................................ 104 CONTENTS Consolidated income statements and consolidated statements of comprehensive income ................................................... 54 Comments on the consolidated income statements .......................... 55 Consolidated balance sheets ................................................................... 56 Comments on the consolidated balance sheets .................................. 57 Consolidated statements of cash ﬂow ................................................... 58 Comments on the consolidated statements of cash ﬂow .................. 59 Consolidated statements of changes in equity and comments ........................................................................... 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1 Accounting policies ............................................................... 62 Note 2 Segment information ............................................................ 63 Note 3 Acquisitions ............................................................................. 65 Note 4 Divestment of businesses .................................................... 66 Note 5 Research and development .................................................. 66 Note 6 Expenses by nature ............................................................... 66 Note 7 Other operating income and expenses .............................. 67 Note 8 Financial income and ﬁnancial expenses .......................... 67 Note 9 Taxes ......................................................................................... 68 Note 10 Intangible assets .................................................................... 69 Note 11 Property, plant and equipment ........................................... 72 Note 12 Right-of-use assets ................................................................ 74 Note 13 Inventories ............................................................................... 75 Note 14 Financial assets ...................................................................... 76 Note 15 Other short-term assets ...................................................... 78 Note 16 Share capital ........................................................................... 78 Note 17 Earnings per share ................................................................. 79 Note 18 Provisions for post-employment beneﬁts ........................ 79 Note 19 Other provisions and contingent liabilities ....................... 82 Note 20 Financial liabilities .................................................................. 84 Note 21 Other short-term liabilities .................................................. 85 Note 22 Related parties including associated companies ........................................................... 85 Note 23 Remuneration to key Management .................................... 86 Note 24 Fees to the auditors ............................................................... 89 Note 25 Average number of employees ............................................ 90 Note 26 Financial risk management ................................................. 90 Note 27 Non-controlling interests ..................................................... 93 Note 28 Subsequent events ................................................................ 93 Amounts in MSEK unless otherwise stated. Amounts in parentheses refer to comparable ﬁgures for 2020. The Administration Report is presented on pages 14– 105. It has been audited by SKF’s external auditors. See the Auditor’s Report on pages 106–109. Accord- ing to theSwedish Annual Accounts Act chapter 6, §11, SKF’s statutory sustainability report isprepared as a separate report. The scope of this Sustainability Report is presented on page 110. Financial statements 54 SKF Annual Report 2021 CONSOLIDATED INCOME STATEMENTS Consolidated income statements January–December MSEK Note 2021 2020 Net sales 2 81,732 74,852 Cost of goods sold 6 –58,457 –55,348 Gross proﬁt 23,275 19,504 Research and development expenses 5 –2,751 –2,515 Selling expenses 6 –9,736 –9,732 Administrative expenses 6 –514 –521 Other operating income 7 1,188 1,019 Other operating expenses 7 –725 –702 Income from associated companies 7 21 16 Operating proﬁt 10,758 7,069 Financial income 8 102 72 Financial expenses 8 –797 –841 Proﬁt before taxes 10,063 6,300 Income tax 9 –2,484 –1,826 Net proﬁt 7,579 4,474 Net proﬁt attributable to: Shareholders of AB SKF 7,331 4,298 Non-controlling interests 248 176 Basic earnings per share (SEK) 17 16.10 9.44 Consolidated statements of comprehensive income January–December MSEK Note 2021 2020 Net proﬁt 7,579 4,474 Items that will not be reclassiﬁed to the income statement - - Remeasurements (actuarial gains and losses) 18 2,751 –850 Income tax 9 –694 203 2,057 –647 Items that may be reclassiﬁed to the income statement - - Currency translation adjustments 2,759 –3,726 Assets at fair value through other comprehensive income 14 96 –39 Income tax 9 2 8 2,857 –3,757 Other comprehensive income, net of tax 4,914 –4,404 Total comprehensive income 12,493 70 Total comprehensive income attributable to Shareholders of AB SKF 12,127 111 Non-controlling interests 366 –41 55 SKF Annual Report 2021 2020201920182017 2021 Operating proﬁt 0 2.5 5.0 7.5 10.0 12.5 SEK billion 2020 2021 Operating proﬁt development y-o-y Organic sales & manufacturing volumes Cost development Currency impact Items affecting comparability at 2020 years exchange rates 0 2,000 4,000 6,000 8,000 10,000 12,000 SEK million −1,415 1,995 10,758 7,069 5,981 –2,871 Comments on the consolidated income statements General The Group’s income statement for 2021 included the result of two smaller acquired businesses in Sweden for the period 1 September –31 December. It also included the result from a real estate busi- ness for the period 1 January–30 November. Net sales In 2021, net sales amounted to MSEK 81,732 (74,852) corre- sponding to an increase of 9.2% compared to 2020. The change ofthe Swedish krona towards other currencies had a negative impact in 2021 of –3.4%. Structural changes accounted for 0%. Net sales in local currencies increased with 12.6%, driven by higher sales volumes in all regions. Sales development y-o-y, % Q1 Q2 Q3 Q4 Full year Organic 8.6 33.2 7.7 3.8 12.6 Structure — — — — — Currency –9.7 –8.3 0.6 3.4 –3.4 Total –1.1 24.9 8.3 7.7 9.2 Operating proﬁt Operating proﬁt for the year was MSEK 10,758 (7,069). Operating proﬁt was positively impacted by sales volumes, price and customer mix. Operating proﬁt was negatively impacted by currency effects and cost increases related to material, logistics and energy. Operat- ing proﬁt included items affecting comparability of MSEK –81 (– 2,124) whereof MSEK –466 (–1,683) related to the restructuring and cost reduction program and MSEK +385, net (–442) related to gain on sales of assets and impairments in 2021 and settlements and impairments offset by a VAT credit in 2020. Financial income and expenses, net The ﬁnancial income and expenses, net for 2021 was MSEK –695 (–769). For more information about the changes year-over-year, see Note 8. Taxes The effective tax rate for the year was 25% (29). The tax rate in 2020 was negatively impacted by withholding tax on intra-group dividends of MSEK –128. Adjusted for this the tax rate would have been 27%. For more information, see Note 9. Values by quarter MSEK Q1 Q2 Q3 Q4 Full year Net sales 19,865 20,735 20,146 20,986 81,732 Operating proﬁt 2,699 2,878 2,588 2,594 10,758 Proﬁt before taxes 2,495 2,801 2,440 2,328 10,063 Basic earnings per share (SEK) 3.91 4.59 3.86 3.74 16.10 56 SKF Annual Report 2021 CONSOLIDATED BALANCE SHEETS 0 5 10 15 20 % 202120202019 Return on capital employed 0 10 20 40 30 50 % 202120202019 Gearing Consolidated balance sheets As of 31 December MSEK Note 2021 2020 ASSETS Non-current assets - - Goodwill 10 10,924 10,117 Other intangible assets 10 6,018 6,125 Property, plant and equipment 11 20,723 18,161 Right-of-use assets 12 2,661 2,517 Long-term ﬁnancial assets 14 1,213 1,306 Deferred tax assets 9 3,839 4,800 Other long-term assets 461 633 45,839 43,659 Current assets - - Inventories 13 20,997 15,733 Trade receivables 14 13,972 12,286 Other short-term assets 15 5,163 4,242 Other short-term ﬁnancial assets 14 438 587 Cash and cash equivalents 14 13,219 14,050 53,789 46,898 Total assets 99,628 90,557 EQUITY AND LIABILITIES - - Equity attributable to shareholders of AB SKF 43,645 34,309 Equity attributable to non-controlling interests 27 1,720 1,403 45,365 35,712 Non-current liabilities - - Long-term ﬁnancial liabilities 20 13,293 13,065 Long-term lease liabilities 12, 20 2,179 2,024 Provisions for post-employment beneﬁts 18 11,781 15,170 Deferred tax provisions 9 1,040 792 Other long-term provisions 19 1,412 2,073 Other long-term liabilities 33 77 29,738 33,201 Current liabilities - - Trade payables 20 9,881 8,459 Short-term provisions 19 1,105 1,409 Short-term lease liabilities 12, 20 579 560 Other short-term ﬁnancial liabilities 20 3,285 2,700 Other short-term liabilities 21 9,675 8,516 24,525 21,644 Total equity and liabilities 99,628 90,557 0 10 20 30 40 50 % 202120202019 Equity/assets 57 SKF Annual Report 2021 0 40 80 120 % 160 18171615 19 20 21 Net debt/equity 0 10 20 30 40 SEK billion Net debt Net debt/Equity ratio 0 10 20 30 % 50 40 18171615 19 20 21 Plant and property % of net sales 0 5 10 15 20 25 SEK billion Plant and property Plant and property % of net sales 0 10 20 30 40% Q1 2019 Q2 Q3 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Net working capital in % of annual sales Total trade payables Total trade receivables Inventories Target Net working capital Comments on the consolidated balance sheets Net working capital On 31 December 2021, net working capital as percentage of sales was 30.7 % (26.1) consisting of the following components: • Inventories amounted to MSEK 20,997 (15,733) being 25.7% (21.0) of annual sales. The increase in inventories was attributed to currencies by MSEK 957 and to volumes by MSEK 4,307 net of divestments and acquisitions. • Trade receivables amounted to MSEK 13,972 (12,286) which is 17.1% (16.4) of annual sales. The change in trade receivables was attributable to currencies with MSEK 752 and to volume increase with MSEK 934, net of divestments and acquisitions. The average days of outstanding trade receivables were 64 days (64). • Trade payables amounted to MSEK 9,881 (8,459) corresponding to 12.1% (11.3) of annual sales. The change attributable to cur- rencies was MSEK 450 and the remaining MSEK 972 was due to volume increase, net of divestments and acquisitions. Plant and property On 31 December 2021, plant and property amounted to MSEK 20,997 (18,161). This was as 25.7% (24.3) of annual sales. The change attributable to currencies was MSEK 1,075. Net debt Net debt amounted to MSEK 17,360 (18,460) at the end of 2021. Post-employment beneﬁt provisions totalled MSEK 11,711 (15,136) at year-end, representing a net decrease of MSEK 3,425 (net decrease of 177), which was attributable to: • Cash payments of MSEK –1,740 (–888) • Actuarial gains and losses of MSEK +2,751 (–850) • Expenses of MSEK 574 (757) • Acquired/divested businesses of MSEK 0 (0) • The remainder was attributable to currency translation differences. Loans totalled MSEK 16,454 (15,240), at the end of 2021, repre- senting an increase of MSEK 1,217. The change was primarily attributable to a net increase between the repayment of a bond due and a new bond issued during the year of MSEK 1,022 and positive currency translation effects of MSEK 243. Equity During the year, equity increased from MSEK 35,712 to MSEK 45,365. Net proﬁt amounted to MSEK 7,579 (4,474) and dividends paid were MSEK 3,012 (1,778). Currency translation had a negative effect of MSEK –2,759 (–3,726). Remeasurements had a net of tax effect of MSEK 2,059 ( –639). The capital structure target for the Group is a gearing of around 50%, corresponding to an equity/ assets ratio of around 35% or a net debt/equity ratio, excluding pension liabilities, below 40%. This underpins the Group’s ﬁnancial ﬂexibility and its ability to continue investing in its business. On31December 2021, the gearing was 40.5% (48.0), the equity/ assets ratio 45.5% (39.4) and the net debt/equity ratio, excluding pension liabilities 12.5 % (9.3). 58 SKF Annual Report 2021 CONSOLIDATED STATEMENTS OF CASH FLOW Consolidated statements of cash ﬂow January–December MSEK Note 2021 2020 Operating activities Operating proﬁt 10,758 7,069 Adjustments for Depreciation, amortization and impairment 6 3,305 3,401 Net gain on sales of businesses and property, plant and equipment –436 –245 Other non-cash items –758 806 Income taxes paid –2,250 –2,240 Contributions to and payments under post-employment deﬁned beneﬁt plans 18 –810 –888 Associated companies 66 –51 Changes in working capital Inventories –4,308 1,542 Trade receivables –931 1,102 Trade payables 970 396 Other operating assets and liabilities, ne t 322 –1,810 Interest and other ﬁnancial items –680 –817 Net cash ﬂow from operating activities 5,248 8,265 Investing activities Additions to intangible assets 10 –68 –39 Additions to property, plant and equipment 11 –3,822 –3,332 Sales of property, plant, equipment, and intangible assets 10, 11 52 354 Acquisitions of businesses, net of cash and cash equivalents 3 –40 –4 Divestments of businesses, net of cash and cash equivalents 4 733 20 Investment in/sale of equity securities –3 –5 Net cash ﬂow used in investing activities –3,148 –3,006 Net cash ﬂow after investments before ﬁnancing 2,100 5,259 Financing activities Proceeds from medium- and long-term loans 3,148 3,303 Repayments of medium- and long-term loans –2,126 –2,455 Payments of leases –738 –799 Cash dividends to shareholders of AB SKF and non-controlling interests –3,012 –1,778 Funding of post-employment beneﬁts –930 — Investments in ﬁnancial assets –33 –409 Sales of ﬁnancial assets 178 4,829 Net cash ﬂow used in/from ﬁnancing activities –3,513 2,691 Net cash ﬂow –1,413 7,950 Cash and cash equivalents at 1 January 14,050 6,430 Cash effect excluding acquired/sold businesses –1,386 7,953 Cash effect from acquired/sold businesses –27 –3 Translation effect 582 –330 Cash and cash equivalents on 31 December 13,219 14,050 59 SKF Annual Report 2021 20202019 2021 Cash ﬂow after investments, before ﬁnancing 0 2,000 4,000 6,000 8,000 10,000 MSEK 202120202019 Additions to property, plant and equipment 0 1,000 2,000 3,000 4,000 MSEK 20202019 2021 Paid dividend per A and B share 0 2 4 8 SEK 6 0 50 100 200 250 150 300 MEUR 2024 2025 2027 2029 2022 2031 Debt structure Q3 Q4Q2 Q3 Q4Q2 Q3 Q4 Q2Q1 2020 Q1 2019 Q1 2021 Cash ﬂow after investments before ﬁnancing 1) 1) Excl. acquisitions/divestments -1,000 1,000 2,000 3,000 4,000 MSEK 0 0 2,000 6,000 4,000 MSEK 8,000 Quarter 12-month rolling Comments on the consolidated statements of cash ﬂow The consolidated statements of cash ﬂow have been adjusted for exchange rate effects arising upon the translation of foreign subsidiaries’ balance sheets to SEK, as these do not represent cash ﬂows. Cash and cash equivalents comprise of cash on hand, bank deposits, debt securities and other liquid investments that have amaturity of three months or less at the time of the investment. Cash ﬂow after investments before ﬁnancing Cash ﬂow after investments before ﬁnancing, which is the primary cash ﬂow measure used in the Group, reached MSEK 2,100 (5,259) in 2021. Adjusted for acquisitions and divestments of businesses, the cash ﬂow amounted to MSEK 1,407 (5,243). Other non-cash items included expenses for which the cash ﬂow has not yet occurred. The most signiﬁcant items were related to unrealized exchange differences and expenses on the post-employment beneﬁts. Interest and other ﬁnancial items included interest paid of MSEK –239 (–431), interest received of MSEK 24 (116), and the remainder related primarily to realized derivatives on commercial ﬂows between Group companies. During the year, the Group acquired two smaller businesses which generated a net cash outﬂow of MSEK –40. The Group also executed a real estate sale which resulted in a cash inﬂow of MSEK +733. Cash ﬂow used in ﬁnancing activities The Group’s debt structure improved in 2021, by net of repayment of aEUR bond due during the year and with the issuing of a new SEKbond with maturity 2031. Cash ﬂow used in ﬁnancing activities included a payment of MSEK –930 (0), net of taxes, related to con- tributions to the deﬁned beneﬁt retirement plans in the US and in Germany. The Board of Directors’ proposed distribution of surplus for the year 2021, which is sub- ject to approval at the Annual General Meeting in March 2022, includes an ordinary dividend of SEK 7 per share, see Note 16. 60 SKF Annual Report 2021 CONSOLIDATED STATEMENTS OF CASH FLOW MSEK 2021 Closing balance Cash change Businesses acquired/sold Other non-cash changes Translation effect 2021 Opening balance Loans 1) 16,454 1,022 — –51 243 15,240 Post-employment beneﬁts, net 2) 11,711 –1,740 — –2,183 498 15,136 Lease liabilities 2,758 –738 — 756 156 2,584 Other short-term ﬁnancial assets 3) –344 113 — 15 –22 –450 Cash and cash equivalents –13,219 1,386 27 — –582 –14,050 Net debt 17,360 43 27 –1,463 293 18,460 Derivatives 4) included in Other ﬁnancing items — — — — — — MSEK 2020 Closing balance Cash change Businesses acquired/sold Other non-cash changes Translation effect 2020 Opening balance Loans 1) 15,240 848 — 9 –587 14,970 Post-employment beneﬁts, net 2) 15,136 –888 — 921 –210 15,313 Lease liabilities 2,584 –799 — 602 –230 3,011 Other short-term ﬁnancial assets 3) –450 4,225 — –21 34 –4,688 Cash and cash equivalents –14,050 –7,953 3 — 330 –6,430 Net debt 18,460 –4,567 3 1,511 –663 22,176 Derivatives 4) included in Other ﬁnancing items — –314 — –133 — 447 1) Excludes derivatives, see Note 20. 2) Other non-cash changes includes remeasurements as well as expenses on deﬁned beneﬁt plans, see Note 18. 3) Other short-term ﬁnancial assets excludes derivatives, see Note 14. Cash change of MSEK 113 (4,225) is explained by investment in ﬁnancial assets of MSEK –14 (–396) and sale of ﬁnancial assets ofMSEK127 (4,621). 4) Financing activities to hedge short- and long-term loans. Other ﬁnancing items in cash ﬂow include cash ﬂow from derivatives as stated in the table and interest premium for the repayment of loans. Change in net debt Cont. Comments on the consolidated statements of cash ﬂow 61 SKF Annual Report 2021 Consolidated statements of changes in equity Equity attributable to owners of AB SKF MSEK Share capital Share premium FV OCI reserve Translation reserve Retained earnings Subtotal Non- controlling interests 1) Total Opening balance 1 January 2020 1,138 564 130 2,237 31,443 35,512 1,854 37,366 Net proﬁt — — — — 4,299 4,299 175 4,474 Hyperinﬂation adjustment 3) — — — — 99 99 — 99 Components of other comprehensive income Currency translation adjustments — — — –3,513 — –3,513 –213 –3,726 Change in FV OCI assets and cash ﬂow hedges — — –39 — — –39 — –39 Remeasurements — — — — –847 –847 –3 –850 Income taxes — — — 8 202 210 1 211 Transactions with shareholders Non-controlling interest 1) — — — — 50 50 — 50 Cost for Performance Share Programmes, net 2) — — — — –95 –95 — –95 Dividends — — — — –1,366 –1,366 –412 –1,778 Closing balance 31 December 2020 1,138 564 91 –1,268 33,785 34,310 1,402 35,712 Net proﬁt — — — — 7,331 7,331 248 7,579 Hyperinﬂation adjustment 3) — — — — 146 146 — 146 Components of other comprehensive income Currency translation adjustments — — — 2,637 — 2,637 122 2,759 Change in FV OCI assets and cash ﬂow hedges — — 96 — — 96 — 96 Remeasurements — — — — 2,751 2,751 — 2,751 Income taxes — — — 1 –693 –692 — –692 Transactions with shareholders Non-controlling interests — — — — — — — — Cost for Performance Share Programmes, net 2) — — — — 25 25 — 25 Dividends — — — — –2,959 –2,959 –52 –3,011 Closing balance 31 December 2021 1,138 564 187 1,370 40,386 43,645 1,720 45,365 1) See Note 27 for details. 2) See Note 23 for details. 3) See Note 1 for details. Fair value other comprehensive income reserve The fair value other comprehensive income (FV OCI) reserve accu- mulates changes in the fair value of assets recognized directly in other comprehensive income, net of tax, with the exception of any dividends and any impairment losses. See Note 14 for details on FVOCI assets. Hedging reserve The hedging reserve accumulates activity related to cash ﬂow hedges, net of tax, being both changes in fair value as well as amounts released to the income statement. See Note 26 for detailson hedging activity. Translation reserve Exchange differences relating to the translation from the functional currencies of the SKF Group’s foreign subsidiaries into SEK are accumulated in the translation reserve. Upon the sale of a foreign operation, the accumulated translation amounts are recycled to the income statement and included in the gain or loss on the disposal. Additionally, gains and losses on hedging instruments meeting the criteria for hedges of net investments in foreign operations, are recognized in the translation reserve net of tax. See Note 26 for details. NOTES GROUP 62 SKF Annual Report 2021 Notes to the consolidated ﬁnancial statements Basis of presentation The consolidated ﬁnancial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). Furthermore, the Group is in com- pliance with the Swedish Financial Reporting Board’s RFR 1, Supplementary Accounting Rules for Groups, as well as their interpretations (UFR). The Annual Report of the Parent Company, AB SKF, has been signed by the Board of Directors on 2 March 2022. The income statement and balance sheet, and the consolidated income state- ment and consolidated balance sheets are subject to adoption at the Annual General Meeting on 24 March 2022. The consolidated ﬁnancial statements are prepared on the historical cost basis except as disclosed in the accounting policies below or in respective note. Basis of consolidation The consolidated ﬁnancial statements include the Parent Company, AB SKF and those companies in which it directly or indirectly exer- cises control, and hereafter is referred to as “the Group”, “SKF” or “the SKF Group”. Control exists when the Group has the right to direct the relevant activities of a company, is exposed to variable returns and can use those rights to affect those returns. For the vast majority of the Group’s subsidiaries, control exists via 100% ownership. There is also a very limited number of subsidiaries con- trolled by SKF where ownership is between 50–100%. The largest of such companies is SKF India Ltd. that is a publicly listed company in India of which the Group has control via ownership of 52.6% of the voting rights. For the subsidiaries where less than 100% is owned, the non-controlling interests are shown separately within equity. Translation of foreign ﬁnancial statements and items denominated in foreign currency AB SKF’s functional currency is the Swedish krona (SEK), which is also the Group’s reporting currency. All foreign subsidiaries report in their functional currency, beingthe currency of the primary economic environment in which the subsidiary operates. Upon consolidation, all balance sheet itemsare translated to SEK based on the year-end ex change rates. Income statement items are translated at average exchange rates, with an exception for those mentioned below in hyperinﬂation reporting. The accumulated exchange differences arising from these translations are recognized via other comprehensive income to the translation reserve in equity. Such translation differences are reclassiﬁed into the income statement upon thedisposal of the foreign operation. Transactions in foreign currencies during the year have been translated at the exchange rate prevailing at the respective trans- action date. Assets and liabilities denominated in a foreign currency, prim- arily receivables and payables and loans, have been translated at the exchange rates prevailing at the balance sheet date. Exchange gains and losses related to trade receivables and payables and other operating receivables and payables are included in other operating income and other operating expenses. The exchange gains and losses relating to other ﬁnancial assets and liabilities are included in ﬁnancial income and ﬁnancial expenses. Exchange rates The following exchange rates have been used when translating the ﬁnancial statements of foreign subsidiaries operating in the countries shown below into SEK: Average rates Year-end rates Country Unit Currency 2021 2020 2021 2020 Argentina 1 ARS 0.10 0.15 0.09 0.10 China 1 CNY 1.43 1.44 1.42 1.25 EMU countries 1 EUR 10.99 11.38 10.23 10.02 India 100 INR 12.53 13.55 12.16 11.16 Brazil 1 BRL 1.72 2.00 1.59 1.57 United Kingdom 1 GBP 12.71 12.85 12.18 11.09 USA 1 USD 9.25 10.00 9.05 8.18 Hyperinﬂation reporting Argentina is classiﬁed as a hyperinﬂation economy. Since SKF has operations in the country, the Group has applied IAS 29 Financial Reporting in Hyperinﬂationary Economies and restated the ﬁnancial statements accordingly. The Argentinian indexes used in the restatement are; Wholesale Domestic Price Index (IPIM) and Consumer Price Index (IPC). Revenue Revenue consists of sales of products or services in the normal course of business. Service revenues are deﬁned as business activities, billed to a customer, that do not include physical products or where the supply of any product is subsidiary to the fulﬁlment of the contract. Any products that are included in service contracts are reported as separate performance obligations and classiﬁed as revenue from products. Revenue is recognized when the control hasbeen transferred tothe customer. Sales are recorded net of allowances for volume rebates, sales returns and other variable considerations if it is highly probable that they will occur. Revenues from products are recognized at a point in time. Reve- nues from service and/or maintenance contracts are either recog- nized at a point in time or over time. In those contracts where the service is delivered to the customer over time, the revenue is accounted for over the duration of the contract with the use of either the input or output methods. These are different methods to measure the progress towards a complete satisfaction of a performance obligation. Revenue from all other service contracts is accounted for at a point in time. Any anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. For revenue presented per customer industry, segment and geographic area, see Note 2. 1 Accounting policies 63 SKF Annual Report 2021 Critical accounting estimates and judgements Management believes that the following areas contain the most keyjudgements and the most signiﬁcant sources of estimation uncertainty used in the preparation of the ﬁnancial statements, where a different opinion or estimate could lead to signiﬁcant changes to the Group’s ﬁnancial statements in the upcoming year. • Judgement on the realizability of deferred tax assets (Note 9). • Judgements in recoverability of the carrying value of internally developed software (Note 10). • Estimates and key assumptions used in impairment testing of intangible assets (Note 10). • Judgements used in determening extension options for right of use assets (Note 12). • Signiﬁcant assumptions used in the calculation of the post employment beneﬁt obligations (Note 18). • Judgements used in the recognition and disclosure of provisions and contingent liabilities (Note 19). • Climate risks are taken into consideration in investing decisions and impairment testing. New accounting principles New accounting principles 2021 IASB issued several new and amended accounting standards thatwere endorsed by EU, effective date 1 January 2021. None ofthese has had a material effect on the SKF Group’s ﬁnancial statements. New accounting principles 2022 IASB issued several amended accounting standards that were endorsed by EU, effective date 1 January 2022. None of these are expected to have a material effect on the SKF Group’s ﬁnancial statements. The amendments to IFRS 7, IFRS 9 and IFRS 16 are attributable to the reform for reference interest rates - Phase 2 and provide guidance on how the effects of the reform are to be reported. In short, the changes in Phase 2 mean that it enables companies to reﬂect the effects of changing from reference rates such as “STIBOR” to other reference rates without giving rise to accounting effects in reported amounts that would not provide useful informa- tion to users of ﬁnancial reports. The Group assesses that Phase 2 has no signiﬁcant impact as the use of hedge accounting is very limited. COVID-19 The industries and regions in which SKF operates have been impacted by the effects related to the spread of COVID-19. Due to this there have been uncertainties in demand and revenue growth as well as supply chain challenges which have led SKF to perform several initiatives to reduce costs. Each operating segment is deﬁned as those business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM) and for which discrete ﬁnancial information is available. In the case of SKF, the CODM is deﬁned as Group Management which makes decisions about allocation of resources to the segments and also to assess their performance on a regular basis. The internal reporting package comprises two segments, Industrial and Automotive. This segment information includes sales and operating proﬁt related to all signiﬁcant industrial and automotive customers. Segment proﬁt represents the business result generated by the capital employed of the segment and includes allocated corporate expenses and eliminations. Segment assets include all operating assets used and controlled by a segment and consists principally of property plant and equip- ment, intangible assets, external trade receivables and inventories. Segment liabilities include all operating liabilities used and controlled by a segment and consists principally of external trade payables, other provisions as well as accruals. Reconciling items to the Group’s reported assets and liabilities include consolidation eliminations, all tax-related balances as well as items of a ﬁnancial, interest bearing nature, including post-employment beneﬁt assets and provisions. Asymmetrical allocations affecting the segments relate primarily to post-employment beneﬁts where non-ﬁnancial expenses are allocated to the segments although the related provision is not. Additionally, receivables and payables relating to sales between segments, are not allocated to the segments. Such items are sold toand settled directly with SKF Treasury Centre, the Group’s internal bank, thereby becoming ﬁnancial in nature. Industrial is structured according to a functional approach and ismanaged as one segment comprising six different functional organizations: Industrial Sales Americas, Industrial Sales Europe and Middle East and Africa, Industrial Sales Asia, Industrial Tech- nologies, Bearing Operations, and Aerospace. Industrial sells to customers in the global industrial market, directly and indirectly through SKF’s worldwide distributor net- work. Key customers are companies within industrial drives, heavy industry (such as metals, mining, cement, and pulp and paper), other industrial (such as automation and machine tool), railway, marine, energy (such as wind, oil and gas) and aerospace. These customer industries are served both directly to OEMs and end- users as well as indirectly through SKF’s network of industrial distributors. Automotive sells to customers in the global automotive market, directly or indirectly through SKF’s distributor network. Key customers are manufacturers of cars, light and heavy trucks, trailers, buses, two-wheelers and the vehicle aftermarket. For more information on the customer industries and related products, see pages 6–8. Previously published segment ﬁgures for 2020 have been restated to reﬂect a change in classiﬁcation of smaller customers. 2 Segment information NOTES GROUP 64 SKF Annual Report 2021 Net sales Contribution to proﬁt before tax MSEK 2021 2020 2021 2020 Industrial 58,559 53,912 9,308 6,691 Automotive 23,173 20,940 1,450 378 Subtotal operating segments 81,732 74,852 10,758 7,069 Financial net — — –695 –769 Tot al 81,732 74,852 10,063 6,300 Depreciation and amortization Impairments Additions to property, plant and equipment, intangible assets and right-of-use assets MSEK 2021 2020 2021 2020 2021 2020 Industrial 2,691 2,752 33 23 3,798 3,413 Automotive 581 618 — 8 650 472 Tot al 3,272 3,370 33 31 4,448 3,885 Assets Liabilities MSEK 2021 2020 2021 2020 Industrial 54,518 48,360 11,906 9,852 Automotive 16,856 15,364 6,087 6,006 Subtotal operating segments 71,374 63,724 17,993 15,858 Financial and tax items 19,717 21,518 31,511 33,874 Eliminations and other unallocated items 8,537 5,315 4,759 5,113 Tot al 99,628 90,557 54,263 54,845 Cont. Note 2 Net sales – Total Electrical, 1% Light vehicles, 14% 1 1 Aerospace, 5% Trucks, 6% 2 2 Industrial drives, 10% Vehicle aftermarket, 10% 3 3 Off-Highway, 6% Heavy industries, 5% Marine, 2% 4 Energy, 7% 5 6 9 Railway, 4% Other industrial, 3% 7 Agriculture, food and beverage 1% Industrial distribution, 26% 8 11 10 1 2 2 3 7 6 5 4 3 11 10 1 8 9 Net sales by customer industry – Automotive Light vehicles, 47% 1 Trucks, 20% 2 Vehicle aftermarket, 33% 3 1 2 3 Net sales by customer industry – Industrial Electrical, 1% 1 Aerospace, 7% 2 Industrial drives, 14% 3 Heavy industries, 8% Marine, 3% 4 5 Energy, 11% Off-highway, 8% 6 9 Railway, 6% Other industrial, 5% 7 10 Agriculture, food and beverage, 1% Industrial distribution, 36% 8 11 2 3 4 5 7 9 10 11 6 8 1 65 SKF Annual Report 2021 Net sales are allocated according to the location of the respective customer. Of the Group’s total net sales by customer location, 19%(20) were located in China, 18% (19) in USA and 9% (9) in Germany. Non-current assets exclude ﬁnancial assets, deferred taxassets and post-employment beneﬁt assets. Non-current assets are allocated according to the location of the subsidiaries. Ofthe Group’s total non-current assets as deﬁned above, 30% (28) were located in USA, 15% (15) in Germany, and 13% (10) in China. Geographic disclosure MSEK Net sales by customer location Non-current assets 2021 2020 2021 2020 Sweden 1,871 1,680 4,013 4,270 Europe excl. Sweden 31,732 28,616 15,217 14,467 North America (incl. Mexico) 17,377 17,148 12,308 11,358 Asia-Paciﬁc 25,416 23,486 6,820 5,422 Latin America 5,336 3,922 1,773 1,485 Eliminations — — 585 517 Tot al 81,732 74,852 40,716 37,519 Accounting policy All business combinations are accounted for in accordance with the purchase method. At the date of acquisition, when control is obtained, the acquired assets, liabilities and contingent liabilities (net identiﬁable assets) are measured at fair value. Any excess of the cost of acquisition over fair values of net ident iﬁ- able assets of the acquired business is recognized as goodwill. Companies acquired during the year are included in the ﬁnancial statements as of acquisition date. MSEK 2021 2020 Total fair value of net assets acquired Intangible assets, excluding goodwill — 4 Property, plant and equipment 1 — Current assets 7 — Non-current liabilities — — Current liabilities –3 — Fair value net assets acquired 5 4 Goodwill 36 — Total acquisition cost 41 4 Deferred consideration — — Cash and cash equivalents acquired –1 — Cash outﬂow 40 4 In 2021, SKF had a cash outﬂow of MSEK 40 for the acquisition of two smaller businesses, Edge AB, an industrial consultancy ﬁrm based in Lulea, Sweden and EFOLEX AB, a Gothenburg-based manufacturer of the Europaﬁlter-branded industrial lubrication and oil ﬁltration systems. In 2020, SKF had a cash outﬂow of MSEK 4 for the acquisition ofasmaller business within lubrication. Also during 2020, adjustments were made to the initial PPA relating to the 2019 acquisition of SKF AI (former SKF Presenso). Identiﬁcation of IP were made and a reclassiﬁcation net of tax of MSEK 86 were made from goodwill to other intangible assets. 3 Acquisitions Net sales by geographic area Asia and Paciﬁc, 29% Latin America, 9% North America, 20% Europe, Middle East and Africa, 42% Net sales by geographic area  Industrial Asia and Paciﬁc, 31% Latin America, 7% North America, 20% Europe, Middle East and Africa, 42% Net sales by geographic area  Automotive Asia and Paciﬁc, 26% Latin America, 15% North America, 17% Europe, Middle East and Africa, 42% NOTES GROUP 66 SKF Annual Report 2021 MSEK 2021 2020 Goodwill — — Other intangible assets — — Property, plant and equipment 343 1 Deferred tax assets — — Other non-current assets — 5 Current assets 32 8 Deferred tax provisions — — Non-current liabilities — –1 Current liabilities –10 –1 Non-controlling interest — — Net assets disposed of 365 12 Proﬁt/loss 397 11 Total consideration 762 23 Cash and cash equivalents divested –29 –3 Cash outﬂow for previous years divestments — — Total cashﬂow 733 20 During 2021, the Group executed a real estate sale, resulting in atotal cash inﬂow of MSEK 733 and a net gain of MSEK 397. During 2020, the Group divested smaller businesses in Asia and inSweden, resulting in a total cash inﬂow of MSEK 20 and a net gain of MSEK 11. 4 Divestment of businesses Research and development expenditure, excluding developing ITsolutions, totalled MSEK 2,751 (2,515), corresponding to 3.4% (3.4) of annual sales. MSEK 2021 2020 Employee beneﬁt expenses including social charges 24,270 23,000 Raw material and components consumed, including traded products 27,426 24,361 Change in work in process and ﬁnished goods 2,809 –578 Depreciation, amortization and impairments 3,305 3,401 Other expenses, primarily purchased services, shop supplies and utilities 13,648 17,932 Total operating expenses 71,458 68,116 Depreciation, amortization and impairments were accounted for as (MSEK) 2021 2020 Depre ciation Amortization Impairments Total Depre ciation Amortization Impairments Total Cost of goods sold 2,318 98 33 2,449 2,304 99 20 2,423 Selling expenses 372 484 — 856 454 513 11 978 Tot al 2,690 582 33 3,305 2,758 612 31 3,401 0 1 2 3 5 4 % 6 20202019 2018 20212017 Research and development % of net sales 0 500 1,000 1,500 3,000 MSEK 2,500 2,000 Research and development Research and development % of net sales 5 Research and development 6 Expenses by nature 67 SKF Annual Report 2021 7 Other operating income and expenses MSEK 2021 2020 Other operating income Exchange gains on trade receivables/payables 512 392 Proﬁt from sale of property, plant and equipment 74 247 Proﬁt from associated companies 21 16 Proﬁt from divestment of businesses 397 11 Other 205 369 1) Tot al 1,209 1,035 Other operating expenses Exchange losses on trade receivables/payables –545 –529 Loss from sale of property, plant and equipment –19 –37 Other –161 –136 Tot al –725 –702 Other operating income and expenses, net 484 333 1) Includes VAT credit. MSEK 2021 2020 Interest income 35 68 Interest expense –308 –289 Net gains/losses: Net interest cost on post-employment beneﬁts –146 –239 Exchange differences, net –193 –179 Other ﬁnancial income including dividends 50 4 Other ﬁnancial expense –133 –134 Financial net –695 –769 8 Financial income and ﬁnancial expenses Other ﬁnancial expense includes costs related to unwinding the dis count on provisions, bank charges and other transaction- related costs. The below table speciﬁes which category of ﬁnancial instru ment that gave rise to the ﬁnancial income and expense as described above. For a speciﬁcation of the underlying ﬁnancial assets and ﬁnancial liabilities to these categories, see Note 14 and Note 20. 2021 2020 Financial net speciﬁed by category of ﬁnancial instruments (MSEK) Interest income Interest expense Net gains/ losses Interest income Interest expense Net gains/ losses Financial assets/liabilities at fair value through proﬁt or loss Designated upon initial recognition 1 — — 2 — — Derivatives held for trading 1 –6 –12 1 –65 420 Derivatives held for hedge accounting — — — — — — Financial assets classiﬁed as amortized cost 33 — –118 65 — –23 Financial assets classiﬁed as fair value through other comprehensive income — — 1 — — 10 Other ﬁnancial liabilities, primarily loans — –302 –22 — –224 –582 Other liabilities including post-employment beneﬁts — — –271 — — –373 Tot al 35 –308 –422 68 –289 –548 Derivatives classiﬁed as held for trading are mainly used for economic hedging, which mitigate the effect of certain items in the categories loans and receivables and other liabilities. Net gains/losses are mainly exchange differences and changes in fair value for all the categories except for other liabilities, which includes primarily net interest costs on post-employment beneﬁts and other ﬁnancial expenses. NOTES GROUP 68 SKF Annual Report 2021 Accounting policy Taxes include current taxes on proﬁts, deferred taxes and other taxes such as taxes on capital, actual or potential withholding taxes on current and expected transfers of income from Group companies and tax adjustments relating to prior years. Income taxes are recog- nized in the income statement, except to the extent that they relate to items directly taken to other comprehensive income or to equity, in which case they are recognized in other comprehensive income or directly in equity. All the companies within the Group calculate current income taxes in accordance with the tax rules and regulations of the countries where the income is taxable. The Group applies the required balance sheet approach for measuring deferred taxes, where deferred tax assets and provisions are recorded based on enacted tax rates for the expected future tax consequences when the asset is realized or debt regulated. These tax rates are applied on existing differences between accounting and tax reporting bases of assets and liabilities, as well as for tax loss and tax credit carry-forwards. Such tax loss and tax credit carry- forwards can be used to offset future income. Accounting estimates and judgements Signiﬁcant management judgment is required in determining current tax liabilities and assets as well as deferred tax provisions and assets. The process involves estimating the current tax together with assessing temporary differences arising from differing treatment of items for tax and accounting purposes. Theprocess also involves judgements when there is uncertainty over income tax treatments. In particular, management assesses the likelihood that deferred tax assets will be recoverable from future taxable income. Deferred tax assets are recorded to the extent that it is probable in manage- ment’s opinion that sufﬁcient future taxable income will be available to allow the recognition of such beneﬁts. 9 Taxes 2021 2020 Gross deferred taxes per type (MSEK) Deferred tax assets Deferred tax liabilities Deferred tax assets Deferred tax liabilities Intangibles and other assets 27 1,377 25 1,236 Property, plant and equipment 52 932 66 874 Inventories 555 409 544 322 Trade receivables 57 1 49 1 Provisions for post-employment beneﬁts 2,643 62 3,324 47 Other accruals and liabilities 1,018 1 956 49 Tax loss carry-forwards 835 — 1,178 — Tax credit carry-forwards 185 — 179 — Other 286 77 322 106 Gross deferred taxes 5,658 2,859 6,643 2,635 Net deferred taxes presented in the Consolidated balance sheet 3,839 1,040 4,800 792 2021 2020 Tax expense (MSEK) Income statement Other comprehensive income Total taxes Income statement Other comprehensive income Total taxes Current taxes –1,951 — –1,951 –2,222 — –2,222 Deferred taxes –533 –692 –1,225 396 211 608 Tot al –2,484 –692 –3,176 –1,826 211 –1,614 Taxes charged to other comprehensive income included MSEK -694 (203) related to remeasurements of post-employment beneﬁts, MSEK 1 (0) related to cash ﬂow hedges and MSEK 1 (8) related to net investment hedges. Reconciliation of the statutory tax in Sweden to the actual tax (MSEK) 2021 2020 Tax calculated using statutory tax rate in Sweden –2,073 –1,348 Difference between statutory tax rate in Sweden and foreign subsidiaries –340 –180 Other taxes –55 –72 Tax credits and similar items 28 59 Non-deductible/non-taxable proﬁt items –48 –319 Tax loss carry-forwards –56 27 Current tax referring to previous years 10 –14 Other 50 21 Tax expense Income Statement –2,484 –1,826 The corporate statutory income tax rate in Sweden was 20.6% (21.4). The actual tax rate on proﬁt before taxes was 24.7% (29.0). 69 SKF Annual Report 2021 Realizability of net deferred tax assets are assessed by manage- ment based on the individual company’s proﬁtability history, fore- casts of taxable proﬁts as well as length to expiry of the asset. The SKF Group had total unrecognized deferred tax assets of MSEK 183 (183), whereof MSEK 101 (107) related to tax loss carry- forwards and MSEK 82 (77) related to other deductible temporary differences. These were not recognized due to the uncertainty of future proﬁt streams. Unrecognized deferred tax assets of MSEK 0 (7) related to taxlosses and will expire during the period 2022 to 2026. The remaining unrecognized assets will expire after 2026 and/or may be carried forward indeﬁnitely. The change in the balance of unrecognized deferred tax assets that reduced current tax expense was MSEK 11 (1) mainly relating to the use of tax loss carry-forwards. The change in the balance ofunrecognized deferred tax assets that impacted deferred tax expense was MSEK -11 (51) which resulted from a revised judgement on the realizability of certain tax assets in future years. Gross value of tax loss carry-forwards As of 31 December 2021, the Group had tax loss carry-forwards amounting to MSEK 4,426 (6,042), which are available for offset against taxable future proﬁts. Such tax loss carry-forward expire as follows: 2022–2026 74 2027 and thereafter 333 Never 4,019 Accounting policy Intangible assets are stated at initial cost less any accumulated amortization and any impairment. Amortization is made on a straight line basis over the estimated useful lives and begins once the asset is ready for its intended use. The useful lives are based toa large extent on historical experience, the expected application, as well as other individual characteristics of the asset. The useful lives are: • Patents and similar rights up to 11 years. • Software in use 4–12 years. • Customer relationships 10–15 years. • Product development expenditures 3–7 years. • Technology acquired in business combinations 15–18 years. • Other intangibles 3–5 years. • Strategic tradenames indeﬁnite. • Goodwill indeﬁnite. Amortization and impairments are included in cost of goods sold, selling expenses or administrative expenses depending on where the assets have been used. Internally developed intangibles The Group’s most signiﬁcant internally developed intangibles are software in use, developed for internal purposes and to a minor extent product development. The amortization plan for SKF ERP Programme (SEP) is a straight-line amortization for the rest of the useful life, with an amortization rate of 10%. Intangible assets with deﬁnite useful lives Intangible assets with deﬁnite useful lives are tested for impair- ment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The determination isusually performed at the cash generating unit (CGU) level but could also be at the individual asset level. Factors that are considered important are: • Underperformance relative to historical and forecasted operating results; • Signiﬁcant negative industry or economic trends; • Signiﬁcant changes relative to the asset including plans to discontinue or restructure the operation to which the asset belongs. When there is an indication that the carrying value may not be recoverable based on the above indicators, the proﬁtability of the CGU to which the asset belongs is analyzed to further conﬁrm the nature and extent of the indication. If an indication is conﬁrmed, an impairment loss is recognized to the extent that the carrying amount of the affected assets exceeds its recoverable amount. Intangible assets with indeﬁnite useful lives Goodwill and other intangible assets with indeﬁnite useful lives have been allocated to CGUs, and are tested for impairment annually and whenever an indication of impairment exists. The impairment test is carried out at the lowest level at which these assets are moni- tored by management. The lowest CGU level used for impairment test is the segment level, Industrial and Automotive. Accounting estimates and judgements Signiﬁcant management judgement is required in determining if development expenditures should be capitalized. Such expenses are only capitalized when it is probable that they will result in future economic beneﬁts for the Group and the expenditures during the development phase can be reliably measured. The Group applies stringent criteria before a development project results in the record- ing of an asset, which include the ability to complete the project, evidence of technical feasibility, intention and ability to use or sell the asset. When evaluating software for internal use, management speciﬁcally considers new functionality and/or increased standard of performance to be strong evidence that future economic beneﬁts will be achieved. In evaluating product development projects, management considers the existence of a customer order as signiﬁ- cant evidence of technological and economic feasibility. All other research expenditures as well as development expenditures not meeting the capitalization criteria, are charged to cost of goods sold in the income statement when incurred. When there is an indication that the carrying value may not berecoverable, the carrying amount of the asset is compared against its recoverable amount. The recoverable amount is the 10 Intangible assets NOTES GROUP 70 SKF Annual Report 2021 greater of the estimated fair value less costs to sell and value in use. In assessing value in use, a discounted cash ﬂow model (DCF) is used. This assessment contains a key source of estimation uncertainty because the estimates and assumptions used in the DCF model encompass uncertainty about future events and market conditions. The actual outcomes may be signiﬁcantly different. However, estimates and assumptions are reviewed by management and are consistent with internal forecasts and business outlook. The DCF model involves the forecasting of future operating cash ﬂows over a ﬁve-year period and includes estimates of revenues, production costs and working capital requirements, as well as anumber of assumptions, the most signiﬁcant being the revenue growth rates and the discount rate. These forecasts of future operating cash ﬂows are built up from business strategic plans representing management’s best estimates of future revenues andoperating expenses using historical trends, general market conditions, industry trends and forecasts and other currently available information. Estimates are extrapolated using growth rates determined on an individual CGU basis, reﬂecting a combina- tion of product, industry and country growth factors. A terminal value is then calculated based on the Gordon Growth model, which includes a terminal growth factor representing an outlook not exceeding the market growth for the industry. Forecasts of future operating cash ﬂows are adjusted to present value by an appropriate discount rate derived from the Group’s cost of capital, considering the long-term government bond rate, the corporate spread, the market risk premium, the country risk pre- mium where applicable, and the systematic risk of the CGU at the date of evaluation. Management determines the discount rate to beused based on the risk inherent in the related activity’s current business model and industry comparisons. MSEK 2021 Closing balance Additions Businesses acquired/ sold Disposals Impairments Other 1) Translation effects 2021 Opening balance Acquisition cost Goodwill 11,493 — 36 — — –44 611 10,890 Patents, tradenames and similar rights 2,942 15 — — — –3 225 2,705 Internally developed software 2,666 45 — — — — 4 2,617 Customer relationships 4,700 — — — — 2 320 4,378 Leaseholds 279 — — — — — 33 246 Product development 361 1 — — — — 13 347 Technology 1,214 — — — — — 84 1,130 Other intangible assets 232 7 — — — –6 4 227 Tot al 23,887 68 36 — — –51 1,294 22,540 MSEK 2021 Closing balance Amorti- zations Businesses acquired/ sold Disposals Impairments Other 1) Translation effects 2021 Opening balance Accumulated amortization and impairments Goodwill 569 — — — — –46 –158 773 Patents, tradenames and similar rights 529 29 — — 2 14 –1 485 Internally developed software 1,376 184 — — — — 5 1,187 Customer relationships 3,283 274 — — — 1 191 2,817 Leaseholds 110 5 — — — — 12 93 Product development 197 12 — — — — 7 178 Technology 796 74 — — — — 55 667 Other intangible assets 85 4 — — — –18 1 98 Tot al 6,945 582 — — 2 –49 112 6,298 Net book value 16,942 16,242 1) Includes reclassiﬁcation between categories. Cont. Note 10 71 SKF Annual Report 2021 MSEK 2020 Closing balance Additions Businesses acquired/ sold Disposals Impairments Other 1) Translation effects 2020 Opening balance Acquisition cost Goodwill 10,890 8 — –1 — –83 –1,133 12,099 Patents, tradenames and similar rights 2,705 8 — — — 9 –316 3,004 Internally developed software 2,617 10 — –3 — 19 –9 2,600 Customer relationships 4,378 2 — — — –6 –472 4,854 Leaseholds 246 — — — — –8 –17 271 Product development 347 8 — — — –1 –18 358 Technology 1,130 — — — — –3 –115 1,248 Other intangible assets 227 3 4 — — 107 –6 119 Tot al 22,540 39 4 –4 — 34 –2,086 24,553 MSEK 2020 Closing balance Amorti- zations Businesses acquired/ sold Disposals Impairments Other 1) Translation effects 2020 Opening balance Accumulated amortization and impairments Goodwill 773 — — — — 11 –86 848 Patents, tradenames and similar rights 485 23 — — — 9 –21 474 Internally developed software 1,187 182 — –3 — 2 –9 1,015 Customer relationships 2,817 285 — –11 — –21 –285 2,849 Leaseholds 93 5 — 11 — –8 –6 91 Product development 178 7 — — — –33 –10 214 Technology 667 92 — — — 66 –69 578 Other intangible assets 98 18 — — — –2 –5 87 Tot al 6,298 612 — –3 — 24 –491 6,156 Net book value 16,242 18,397 1) Includes reclassiﬁcation between categories. Impairment losses Impairments amounted to MSEK –2 (0) in 2021. Intangibles with indeﬁnite useful lives Certain tradenames and trademarks are considered to have indeﬁ- nite useful lives as the Group anticipates to continue to promote these brands in the foreseeable future. This includes the trade- names and trademarks in Lincoln MSEK 1,195 (1,080), Kaydon Friction MSEK 702 (536), PEER MSEK 195 (178), GBC MSEK 206 (187) and others MSEK 95 (71). Signiﬁcant intangibles Internally generated software related primarily to the development of SEP to create and deploy improved processes and solutions across the Group. The balance of capitalized expenditures was MSEK 1,240 (1,411), including amortizations of MSEK –174 (–174) made during 2021. Remaining useful life is seven years. Other individual intangible assets that are material for the Group include the customer relationships for Lincoln amounting to MSEK 521 (603) having a remaining useful life of four years, and for Kaydon amounting to MSEK 654 (622) having a remaining useful life of seven years. CGUs with signiﬁcant intangibles The CGUs follow the segment reporting. The table below shows goodwill and other intangibles with in deﬁnite useful lives allocated to the CGUs Industrial and Automotive, as well as some crucial rates that were used for the DCF calculation. 2021 2020 Industrial Auto motive Industrial Auto motive Goodwill, MSEK 10,535 389 9,902 215 Tradenames, MSEK 2,092 206 2,077 187 Average revenue growth rate, % 6.5 4.6 6.1 5.9 Discount rate, pre tax, % 9.2 9.7 10.5 10.7 Terminal growth factor, % 2.5 2.5 2.5 2.5 The recoverable amounts used in the testing of the CGUs have been calculated based on value in use using the DCF model as described in Accounting estimates and judgements. The most signiﬁcant assumptions are the discount rate and the growth rates, being both the revenue growth rates and the terminal growth factor. Revenue growth rates are expressed in the above table as the average growth rate over the ﬁve-year forecast period. The same discount rate is applied to all cash ﬂows in the ﬁve-year fore- cast period. Additional information on the forecast period as well as the discount rate and growth rates and how they are calculated is described in accounting estimates and judgements above. A number of sensitivity analyzes were performed to evaluate ifany reasonable possible adverse changes in assumptions would lead to impairment. The analyzes focused around decreasing the revenue growth rates to zero, and increasing the discount rate by two percentage points, each taken individually and while holding all other assumptions constant. No impairment needs were indicated. 72 SKF Annual Report 2021 NOTES GROUP Accounting policy Machinery and supply systems, land, buildings, tools, ofﬁce equip- ment and vehicles are stated in the balance sheet at cost, less accumulated depreciation and any impairment loss. A component approach to depreciation is applied. This means that where items of property, plant and equipment are comprised of different com- ponents having a cost signiﬁcant in relation to the total cost of the items, such components are depreciated separately. Depreciation is provided on a straight-line basis and is calculated based on cost. The rates of depreciation are based on the estimated useful lives of the assets, which are subject to annual review. The useful lives are: • 33 years for buildings and installations. • 10–20 years for machinery and supply systems. • 10 years for control systems within machinery and supply systems. • 4–5 years for tools, ofﬁce equipment and vehicles. Depreciation and impairments are included in cost of goods sold, selling expenses or administrative expenses depending on where the assets have been used. Accounting estimates and judgments The useful lives are based upon estimates of the periods during which the assets will generate revenue and are based to a large extent on historical experience of usage and technological development. PPE is tested for impairment whenever events or changes in circumstances indicates that the carrying value may not be recoverable. Geographical distribution of property, plant and equipment 2020–2021 2021 29% 2020 26% Asia / Paciﬁc 2021 7% 2010 6% Eastern Europe 2021 3% 2020 3% Latin America 2021 13% 2020 13% North America 2021 8% 2020 10% Sweden 2021 40% 2020 42% Western Europe excl. Sweden 2020 2021 11 Property, plant and equipment 73 SKF Annual Report 2021 MSEK 2021 Closing balance Additions Businesses acquired/ sold Disposals Impairments Other 1) Translation effects 2021 Opening balance Acquisition cost Buildings 10,060 272 –352 –17 — 100 493 9,564 Land and land improvements 1,008 3 — –7 — –5 28 989 Machinery and supply systems 34,868 1,259 — –250 — 190 1,645 32,024 Machine tooling and factory ﬁttings 4,631 345 1 –114 — 21 217 4,161 Assets under construction including advances 2) 3,812 1,943 — –64 — –565 143 2,355 Total 54,379 3,822 –351 –452 — –259 2,526 49,093 MSEK 2021 Closing balance Depre- ciation Businesses sold Disposals Impairments Other 1) Translation effects 2021 Opening balance Accumulated depreciation and impairments Buildings 4,947 273 –9 –12 1 2 193 4,499 Land improvements 297 6 — –7 — 3 18 277 Machinery and supply systems 25,081 1,456 — –308 21 –307 1,124 23,095 Machine tooling and factory ﬁttings 3,331 273 — –113 7 –15 118 3,061 Total 33,656 2,008 –9 –440 29 –317 1,453 30,932 Net book value 20,723 18,161 MSEK 2020 Closing balance Additions Businesses acquired/ sold Disposals Impairments Other 1) Translation effects 2020 Opening balance Acquisition cost Buildings 9,564 494 — –16 — 497 –666 9,255 Land and land improvements 989 339 — –85 — 27 –55 763 Machinery and supply systems 32,024 748 –2 –471 — 1,178 –2,405 32,976 Machine tooling and factory ﬁttings 4,161 217 — –58 — 57 –336 4,281 Assets under construction including advances 2) 2,355 1,534 — — — –1,797 –235 2,853 Total 49,093 3,332 –2 –630 — –38 –3,697 50,128 MSEK 2020 Closing balance Depre- ciation Businesses sold Disposals Impairments Other 1) Translation effects 2020 Opening balance Accumulated depreciation and impairments Buildings 4,499 274 — –16 1 5 –299 4,534 Land improvements 277 7 — — 7 –17 –20 300 Machinery and supply systems 23,095 1,507 –1 –448 24 55 –1,668 23,626 Machine tooling and factory ﬁttings 3,061 208 — –35 — –116 –244 3,248 Total 30,932 1,996 –1 –499 32 –73 –2,231 31,708 Net book value 18,161 18,420 1) Includes reclassiﬁcation between categories. 2) Contractual commitments for acquisition of PPE not yet booked amounted to MSEK 0 (89). 74 SKF Annual Report 2021 NOTES GROUP Accounting policy All lease contracts are recognized in the balance sheet, at com- mencement date, as a right-of-use asset and a lease liability. Acontract is or contains a lease if it conveys, to the Group, the right to control the use of an identiﬁed asset for a period of time in exchange for a consideration. A right-of-use asset and a lease liability is recognized for all leases with a term of more than 12 months unless the underlying asset is of low value. The right-of- use asset is subsequently accounted for with the same regulations as Property, plant and equipment. The lease liability is discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the incremental borrowing rate is used. Theincremental borrowing rate is established by the Group’s treasury centre based on currency and maturity of lease contracts. The lease term is determined as the non-cancellable period of thelease, together with periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease if the lessee isreasonably certain not to exercise that option. The Group also applies the practical expedient for ﬁxed non-lease components and includes them together with any lease component in the contract. Any future lease modiﬁcation not registered as a separate contract, is recognized as a remeasurement of the lease liability and an adjustment to the right-of-use asset. Accounting estimates and judgments Management judgement and assumptions are required to deter- mine the value of the right-of-use assets and the present value ofthe lease liability. Such judgement and assumptions involve identifying a lease, deﬁning the lease term and deﬁning the discount rate. Lease expenses for short-term leases, low value-assets and variable lease payments amount to MSEK 277 (290). The lease expenses correspond in all material aspects to the cash ﬂow for those leases. Interest expenses related to leases amount to MSEK 106 (103). MSEK 2021 2020 Short-term lease expenses 198 195 Low-value asset lease expenses 61 66 Variable lease payments not included in lease liability 15 19 Other 3 10 Total 277 290 12 Right-of-use assets MSEK 2021 Closing balance Additions Modiﬁcations Impairments Translation effects 2021 Opening balance Acquisition cost Premises 3,738 401 2 — 216 3,119 Vehicles 682 118 9 — 14 541 Forklifts 247 37 2 — 6 202 Machinery 30 — –4 — 1 33 Ofﬁce equipment 20 2 –4 — 2 20 Other 7 — 2 — –1 6 Total 4,724 558 7 — 238 3,921 MSEK 2021 Closing balance Depre ciation Modiﬁcations Impairments Translation effects 2021 Opening balance Accumulated depreciation and impairments Premises 1,388 441 –60 2 73 932 Vehicles 463 169 –44 — 15 323 Forklifts 150 42 –4 — 4 108 Machinery 40 22 –5 — 1 22 Ofﬁce equipment 16 4 –1 — 1 12 Other 6 4 –4 — –1 7 Total 2,063 682 –118 2 93 1,404 Net book value 2,661 2,517 75 SKF Annual Report 2021 MSEK 2020 Closing balance Additions Modiﬁcations Impairments Translation effects 2020 Opening balance Acquisition cost Premises 3,119 347 –41 — –286 3,099 Vehicles 541 131 14 — –32 428 Forklifts 202 30 3 — –8 177 Machinery 33 — — — –1 34 Ofﬁce equipment 20 4 — — –3 19 Other 6 2 — — — 4 Total 3,921 514 –24 — –330 3,761 MSEK 2020 Closing balance Depre ciation Modiﬁcations Impairments Translation effects 2020 Opening balance Accumulated depreciation and impairments Premises 932 513 –17 –1 –84 521 Vehicles 323 169 — — –19 173 Forklifts 108 56 1 — –6 57 Machinery 22 11 — — –1 12 Ofﬁce equipment 12 6 — — –1 7 Other 7 7 — — — — Total 1,404 762 –16 –1 –111 770 Net book value 2,517 2,991 Accounting policy Inventories are stated at the lower of cost (ﬁrst-in, ﬁrst-out basis) or market value (net realisable value). Initially raw materials and purchased ﬁnished goods are valued at actual purchase costs and work in process and manufactured ﬁnished goods are valued at actual production costs. Production costs include direct costs such as material and labour, as well as manufacturing overhead as appropriate. Accounting estimates and judgements Adjustments to the cost of inventory may be necessary when the cost exceeds net realisable value. Net realisable value is deﬁned as selling price less costs to complete and costs to sell. The estimates used in determining net realisable value are a source of estimation uncertainty. As future selling prices and selling costs are not known at the time of assessment, management’s best estimates are used based on current price and cost levels. Adjustments to net realisable value also include estimates of technical and commercial obsoles- cence on an individual subsidiary basis. Commercial obsolescence isassessed by the rate of turnover and ageing as risk indicators. MSEK 2021 2020 Finished goods 11,686 9,188 Raw materials and supplies 6,901 5,202 Work in process 2,410 1,343 Total 20,997 15,733 Inventory values are stated net of a provision for net realizable value of MSEK 1,353 (1,498). The amount charged to expense for net realizable provisions during the year was MSEK 70 (269). Reversals of net realizable provisions during the year were MSEK 47 (70). 13 Inventories 76 SKF Annual Report 2021 NOTES GROUP Accounting policy Financial assets are classiﬁed in three categories and are based on the Groups business model for managing the asset and the asset’s contractual cash ﬂow characteristics. The assets can be measured at amortized cost, fair value through other comprehensive income (FVOCI) or fair value through proﬁt or loss (FVPL). Financial assets are recognized in the balance sheet when the Group becomes a party to the contractual provisions of a ﬁnancial instrument. Financial assets are initially measured at fair value, which is normally equal to cost. Settlement day recognition is applied for purchases and sales of ﬁnancial assets. Financial assets measured at amortized cost are calculated using the effective interest method. For disclosure purpose, fair values have been calculated using valuation techniques, mainly discounted cash ﬂow analyses based on observable market data. For current receivables, such as trade receivables, the carrying amount is considered to correspond to fair value. Equity securities are measured at fair value. The Group have elected to classify Equity securities at FVOCI since these investments are held as long-term strategic investments. There is no reclassiﬁ- cation of fair value gain or loss when the investment is derecognized and the dividends from those investments are recognized in proﬁt or loss when the Group have the right to receive the payment. Debt securities are valued at fair value based on the current bid price for the securities and they are classiﬁed as either at FVPL or at FVOCI depending on the Groups model for managing those securities and on the characteristics of the cash ﬂows. Derivatives are categorized as held for trading unless they are subject to hedge accounting. Derivatives classiﬁed as held for trading are mainly derivatives used in economic hedges where the changes in fair value are taken directly through proﬁt or loss. Financial assets and allowance for doubtful accounts, are recog- nized with the use of a forward-looking ‘expected-loss’ impairment model which indicates when the asset may not be recovered. The forward-looking information should capture changes in the market that the customers operate in. Financial assets are derecognized when the contractual rights to the cash ﬂow have expired or been transferred together with substantially all risks and rewards. Accounting estimates and judgements An allowance for doubtful accounts for expected losses on trade receivables is maintained. When evaluating the need for an allow- ance, management considers the aging of trade receivable balances, historical write-off experience of customer with similar characteristics. Management does also an estimation of expected credit losses based on market conditions. Where discounted cash ﬂow techniques are used, the future cash ﬂows are determined (if not stated explicit in the contract) based on the best assessment by management and discounted using the market interest rate for similar instruments. 14 Financial assets Financial assets per category 2021 Fair value through proﬁt or loss MSEK Amortized cost Fair value through other comprehensive income At initial recognition Trading Total Of which cur rent Trade receivables 13,972 — — — 13,972 13,972 Cash and cash equivalents 6,320 — 6,899 — 13,219 13,219 Equity securities — 402 — — 402 — Marketable securities — — — 736 736 — Hedging derivatives — — — — 0 — Trading derivatives — — — 94 94 94 Debt securities — 21 6 — 27 6 Other loans and receivables 392 — — — 392 338 Carrying amount 20,684 423 6,905 830 28,842 27,629 Fair value 20,684 423 6,905 830 Financial assets per category 2020 Fair value through proﬁt or loss MSEK Amortized cost Fair value through other comprehensive income At initial recognition Trading Total Of which cur rent Trade receivables 12,286 — — — 12,286 12,286 Cash and cash equivalents 8,952 — 5,098 — 14,050 14,050 Equity securities — 301 — — 301 — Marketable securities — — — 607 607 — Hedging derivatives — — 295 — 295 — Trading derivatives — — — 137 137 137 Debt securities — 22 5 — 27 5 Other loans and receivables 526 — — — 526 445 Carrying amount 21,764 323 5,398 744 28,229 26,923 Fair value 21,764 323 5,398 744 77 SKF Annual Report 2021 Financial assets categorized as amortized cost are non- derivative ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active market. These include trade receivables, loans granted, funds held with banks and deposits comprising princi- pally of funds held with landlords and other service providers, forwhich substantially all initial investment is expected to be recovered. Debt securities and strategic investments in equity securities are categorised as FVOCI. The exception is debt securities held by SKF Treasury Centre which are categorised as FVPL at initial recognition. Financial instruments are designated at FVPL when the Group manages such investments and makes purchase and sale decisions based on their fair value. Derivatives are categorized as trading derivatives unless they are subject to hedge accounting. Fair value hierarchy for ﬁnancial assets at fair value (MSEK) Level 1 Level 2 Level 3 2021 Level 1 Level 2 Level 3 2020 Fair value through other comprehensive income Equity securities 349 — — 349 253 — — 253 Debt securities 21 — — 21 22 — — 22 Fair value through proﬁt or loss Trading securities 680 — 62 742 558 — 55 613 Cash and cash equivalents 6,899 — — 6,899 5,098 — — 5,098 Hedging derivatives — — — — — 295 — 295 Trading derivatives — 94 — 94 — 137 — 137 Total 7,949 94 62 8,105 5,931 432 55 6,418 Financial assets recorded at fair value, which include the columns Fair value through other comprehensive income and Fair value through proﬁt or loss are disclosed above according to the hierarchy that shows the signiﬁcance of the inputs used in the fair value measurements as deﬁned in IFRS 13. Level 1 includes ﬁnancial instruments with a quoted price in an active market. Level 2 includes ﬁnancial instruments with inputs based on observable data other than quoted prices in an active market. Fair value has been calculated using mainly discounted cash ﬂow analyses based on observable market data. Level 3 includes inputs that are not based on observable market data. Amounts for equity securities include MSEK 53 (48) valued at cost and are not included in the speciﬁcation above. Past due, net of allowance Trade receivables by due date (MSEK) Carrying amount Not yet due 1–30 days 31–60 days 61–90 days > 91 days 2021 13,972 12,284 1,201 254 127 106 2020 12,286 10,824 1,096 236 85 45 The average days outstanding of trade receivables in 2021 were 64 days (64). Trade receivables as a percentage of annual net sales totalled 17.1% (16.4). Trade receivables included receivables sold with recourse amounting to MSEK 89 (69). The risk of customer default for these receivables has not been transferred in such a way that the ﬁnancial assets qualify for derecognition. The table below shows the development of the reserve for credit losses on trade receivables. Speciﬁcation of reserve for credit losses (MSEK) 2021 2020 Opening balance 1 January 395 413 Additions 117 121 Reversals –95 –82 Changes through the income statement 22 39 Allowances used to cover write-offs –22 –24 Currency translation adjustments 29 –33 Closing balance 31 December 424 395 NOTES GROUP 78 SKF Annual Report 2021 Number of shares authorized and outstanding A Shares B Shares Total Share capital (MSEK) Opening balance 1 January 2020 32,460,528 422,890,540 455,351,068 1,138 Conversion of A shares to B shares –1,089,473 1,089,473 — — Closing balance 31 December 2020 31,371,055 423,980,013 455,351,068 1,138 Conversion of A shares to B shares – 8 67,122 867,1 22 — — Closing balance 31 December 2021 30,503,933 424,847,135 455,351,068 1,138 An A share has one vote and a B share has one-tenth of a vote. Atthe Annual General Meeting on 18 April 2002, it was decided to insert a share conversion clause in the Articles of Association which allows owners of A shares to convert those to B shares. Since the decision was taken, 196,432,814 A shares have been converted to B shares. The quota value for all shares is SEK 2.50. Dividend policy The SKF Group’s dividend and distribution policy is based on the principle that the total dividend should be adapted to the trend forearnings and cash ﬂow while taking account of the Group’s development potential and ﬁnancial position. The Board of Directors’ view is that the ordinary dividend should amount to around one half of the SKF Group’s average net proﬁt calculated over a business cycle. If the ﬁnancial position of the SKF Group exceeds the target forcapital structure, which is described in Note 26, an add itional distribution to the ordinary dividend could be made in the form ofahigher dividend, a redemption scheme or as a repurchase of the company’s own share. On the other hand, in periods of more uncertainty a lower dividend ratio could be appropriate. Dividend payments The total surplus of the Parent Company amounted to MSEK 23,627 (23,646), see page 105. The Board has decided to propose to the Annual General Meeting, on 24 March 2022, a dividend of SEK 7.00 per share to be paid to the shareholders. The proposed dividend for 2021 is payable to all shareholders on the Euroclear Sweden AB’s public share register as of 28 March 2022. The total proposed dividend to be paid is MSEK 3,187 (2,960). The dividend is subject to approval by shareholders at the Annual General Meet- ing and has not been included as a liability in these ﬁnancial state- ments. On 1 April 2021, a dividend of SEK 6.50 per share was paid to the shareholders. MSEK 2021 2020 Value added tax receivables, net 2,421 2,145 Income tax receivables 1,009 775 Prepaid expenses 637 514 Accrued income 120 138 Advances to suppliers 119 95 Other current receivables 857 575 Total 5,163 4,242 15 Other short-term assets 16 Share capital 79 SKF Annual Report 2021 Accounting policy The post-employment provisions and assets arise from deﬁned beneﬁt obligations in plans which are either unfunded or funded. For the unfunded plans, beneﬁts paid out under these plans come from the all-purpose assets of the company sponsoring the plan. The related provisions carried in the balance sheet represent the present value of the deﬁned beneﬁt obligation. For funded deﬁned beneﬁt plans, the assets of the plans are held in trusts legally sepa- rate from the Group. The related balance sheet provision or asset represents the deﬁcit or excess of the fair value of plan assets over the present value of the deﬁned beneﬁt obligation. However, an asset is recognized only to the extent that it represents a future economic beneﬁt which is actually available to the Group, for example in the form of reductions in future contributions or refunds from the plan. When such excess is not available it is not recognized, but it is disclosed in the note as an asset ceiling adjustment. The projected unit credit method is used to determine the pres- ent value of all deﬁned beneﬁt obligations and the related current service cost. Valuations are carried out quarterly for the most signiﬁcant plans and annually for other plans. External actuarial experts are used for these valuations and estimating the obliga- tions and costs involves the use of assumptions. Remeasurements arise from changes in actuarial assumptions and experience adjustments, being differences between actuarial assumptions and what has actually occurred. They are recognized immediately in other comprehensive income and are never reclassiﬁed to the income statement. For all deﬁned beneﬁt plans the cost charged to the income statement consists of current service cost, net interest cost and when applicable past service cost, curtailments and settlements. Any past service cost is recognized immediately. Net interest cost is classiﬁed as ﬁnancial expense while all other expenses are allocated to the operations based on the employee’s function as manufacturing, selling or administrative. The deﬁned beneﬁt accounting described above is applied only in the consolidated accounts. Subsidiaries, as well as the Parent Company, continue to use the local statutory pension calculations to determine pension costs, provisions and assets in the stand-alone statutory reporting, and when applicable funding requirements. Some post-employment beneﬁts are also provided by deﬁned contribution schemes, where the Group has no obligation to pay beneﬁts after payment of an agreed-upon contribution to the third party responsible for the plan. Such contributions are recognized as expense when incurred. Accounting estimates and judgements Signiﬁcant judgements and assumptions are required to determine the present value of all deﬁned beneﬁt obligations and the related costs. Such assumptions vary according to the economic conditions of the country in which the plan is located and are adjusted to reﬂect market conditions at valuation point. However, the actual costs and obligations that in fact arise under the plans may be materially different from the estimates based on the assumptions due to changing market and economic conditions. The most signiﬁcant assumptions can vary per plan but in gen- eral include discount rate, pension increase rate, salary growth rate and longevity. These assumptions are established for each plan separately. The discount rate for each plan is determined by reference to yields on high quality corporate bonds (AA-rated corporate bonds as well as mortgage bonds for the plans in Sweden) having maturities matching the duration of the obligation. The pension increase rate assumption is relevant mainly for retired plan members, and refers to the indexation of pension payments tied primarily to inﬂation. The salary growth rate is relevant for active plan members and reﬂect the long-term actual experience, the near term outlook and assumed inﬂation. Longevity reﬂects thelife expectancy of plan members and is established based on mortality tables used for each plan. 2021 2020 Net proﬁt attributable to owners of AB SKF (MSEK) 7,331 4,298 Weighted average number of ordinary shares outstanding 455,351,068 455,351,068 Basic earnings per share (SEK) 16.10 9.44 Dilutive shares from Performance Share Programmes — — Weighted average diluted number of shares 455,351,068 455,351,068 Diluted earnings per share (SEK) 16.10 9.44 Basic earnings per share is calculated by dividing the net proﬁt or loss attributable to shareholders of the Parent Company by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of shares outstanding during the period adjusted for all potential dilutive ordinary shares. Performance shares are considered dilutive if vesting conditions are fulﬁlled on the balance sheet date. Shares from the Performance Share Programme are not con- sidered dilutive. 17 Earnings per share 18 Provisions for post-employment beneﬁts NOTES GROUP 80 SKF Annual Report 2021 The Group sponsors post-employment deﬁned beneﬁt plans in a number of subsidiaries. The most signiﬁcant plans are the pension plans in USA, Germany, U.K., and Sweden, which supplement the social security pensions in these countries. USA The major U.S. pension plans, represent around 89% of the total U.S.obligation. Beneﬁts are based on length of service and average ﬁnal salary or a years of service multiplier. All these plans are closed for new entrants, who instead are covered by deﬁned contribution pension solutions. The salary and non-Union deﬁned beneﬁt pension plans have been frozen as of December 2016 and in 2021 the remaining active accruing plans were frozen, hence no additional service cost will be accrued for these plans. Governance of the plans lies with a beneﬁt board whose members are chosen by the board of directors of the U.S. subsidiary. Theplans are subject to regulatory minimum funding requirements based on an adjusted statutory pension formula which in the case of funding deﬁcits, require contributions to achieve full funding in seven years. The U.S. subsidiary also sponsors post-retirement health care plans which are closed for new entrants. The plans provide health care and life insurance beneﬁts for eligible retired employees. Thecompany is entitled to receive a subsidy under the U.S. Medicare Program Part D, for prescription drug costs for certain plan partici- pants. On 31 December 2021, this reimbursement right totalled MSEK 1 (5). Germany The major German pension plans represent around 91% of the total German obligation. Beneﬁts are based on length of service and ﬁnal salary, and are indexed when paid. The majority of entitlement conditions are determined in accordance with a governmental pen- sions act. A plan change affecting around 75% of the participants ofthe major German pension plan occurred from 1 January 2018. For these participants deﬁned contributions are made, and the value of the contributions is guaranteed to the participants as required by German law. Thus, this plan also qualiﬁes as a deﬁned beneﬁt plan even if the beneﬁt for the participants is equal to the contributions made into the plan. United Kingdom The major plans in the U.K. represent around 92% of the total U.K.obligation. Beneﬁts under these plans are based on length of service and a career average revalued earnings basis, andare indexed when paid. As of April 2012, these plans are closed to new entrants, who instead are entitled to deﬁned contribution pension solutions. Responsibility for the governance ofthe plan lies jointly with the subsidiary and a board of trustees comprised of repre- sentatives of the subsidiary as well as plan participants in accord- ance with the Plan constitution. The plan is subject to statutory funding objectives based on the local pension calculation which inthe case of funding deﬁcits have an agreed recovery plan to achieve full funding in ten years. Sweden The major plan in Sweden is the ITP plan and it represents around 90% of the total Swedish obligation. Beneﬁts are based on ﬁnal salary and are indexed when paid. Beneﬁts are established in accordance with a collective agreement established between participating Swedish companies. The plan is closed for employees born after 1978, who instead are entitled to a deﬁned contribution pension solution. The Swedish subsidiaries are required to have credit insurance which covers all pension obligations in case of insolvency. For the Swedish subsidiaries, the portions of the ITP pension ﬁnanced through insurance premiums to Alecta only cover family pension, health insurance and TGL and as such are immaterial. There are no regulatory funding requirements, how- ever voluntary funding has been provided for the plans through afoundation, which is governed jointly by the company and employee representatives. The foundation must comply with government regulations. Other The most signiﬁcant plans include the funded pension plans in Switzerland, Canada, and Belgium. Additionally, there are retire- ment indemnity plans in France and termination indemnity plans inItaly, where lump sum payments are made upon retirement andtermination respectively. 2021 Amounts recognized in the consolidated balance sheet (MSEK) USA pension USA medical Germany pension U.K. pension Sweden pension Other Total Present value of unfunded deﬁned beneﬁt obligation 416 649 728 — 317 868 2,978 Present value of funded deﬁned beneﬁt obligation 8,638 — 10,206 4,838 2,777 1,722 28,181 Less: Fair value of plan assets –7,8 3 6 — –4,737 –4,510 –794 –1,571 –19,448 Total 1,218 649 6,197 328 2,300 1,019 11,711 Reﬂected as Other long-term assets — — — — — –71 –71 Provisions for post-employment beneﬁts 1,218 649 6,197 328 2,300 1,090 11,782 Total 1,218 649 6,197 328 2,300 1,019 11,711 2020 Amounts recognized in the consolidated balance sheet (MSEK) USA pension USA medical Germany pension U.K. pension Sweden pension Other Total Present value of unfunded deﬁned beneﬁt obligation 413 626 823 — 335 859 3,056 Present value of funded deﬁned beneﬁt obligation 8,323 — 11,428 4,456 2,890 1,752 28,849 Less: Fair value of plan assets –7,18 0 — –3,491 –3,905 –728 –1,465 –16,769 Total 1,556 626 8,760 551 2,497 1,146 15,136 Reﬂected as Other long-term assets — — — — — –34 –34 Provisions for post-employment beneﬁts 1,556 626 8,760 551 2,497 1,180 15,170 Total 1,556 626 8,760 551 2,497 1,146 15,136 Cont. Note 18 81 SKF Annual Report 2021 Components of total post-employment beneﬁt expenses (MSEK) 2021 2020 Post-employment deﬁned beneﬁt expense 684 868 Post-employment deﬁned contribution expense 575 486 Total post-employment beneﬁt expenses 1,259 1,354 Whereof amounts charged to: Cost of goods sold 658 737 Selling expenses 435 353 Administrative expenses 20 25 Financial expenses 146 239 Total 1,259 1,354 2021 2020 MSEK Present value of obligation Fair value of plan assets Total Present value of obligation Fair value of plan assets Total Opening balance 1 January 31,905 –16,769 15,136 32,438 –17,125 15,313 Interest expense/(income) 432 –286 146 626 –387 239 Current service cost 533 — 533 513 — 513 Past service cost –4 — –4 17 — 17 Settlements –13 2 –11 –80 5 –75 Other 19 1 20 167 7 174 Subtotal expenses 967 –283 684 1,243 –375 868 Difference between actual return and interest income — –762 –762 — –1,475 –1,475 Actuarial (gains)/losses – demographic assumptions 8 — 8 –27 — –27 Actuarial (gains)/losses – ﬁnancial assumptions –2,170 — –2,170 2,599 — 2,599 Experience adjustments 173 — 173 –247 — –247 Subtotal remeasurements in OCI –1,989 –762 –2,751 2,325 –1,475 850 Employer contribution — –359 –359 — –271 –271 Employee contribution 20 –4 16 27 –5 22 Beneﬁt payments –1,562 165 –1,397 –1,640 1,001 –639 Subtotal cash ﬂow 1) –1,542 –198 –1,740 –1,613 725 –888 Sold businesses — — — — — — Other 2) 19 –134 –115 –213 –584 –797 Translation differences 1,799 –1,302 497 –2,275 2,065 –210 Closing balance 31 December 31,159 –19,448 11,711 31,905 –16,769 15,136 1) Cash outﬂows for 2022 are expected to be some MSEK 750 which include contributions to funded plans as well as payments made directly by the companies under unfunded plans and partially funded plans. 2) Other includes reclassiﬁcation of the German pension plans from deﬁned contribution plans to deﬁned beneﬁt plans, for both 2020 and 2021. 2021 2020 Plan asset composition (MSEK) Quoted Unquoted Total Quoted Unquoted Total Government bonds 1,721 — 1,721 1,622 — 1,622 Corporate bonds 6,072 — 6,072 5,794 5 5,799 Equity instruments 6,223 434 6,657 5,049 449 5,498 Real estate 259 1,648 1,907 232 681 913 Other, primarily cash and other ﬁnancial receivables 2,174 917 3,091 2,053 884 2,937 Total 16,449 2,999 19,448 14,750 2,019 16,769 The SKF Group strives to balance risk in the investments of plan assets, by aiming for a range of 30–50% equity instruments with the remainder in lower risk/ﬁxed income investments such as corporate and government bonds. The investment positions for the major pension plans are managed within the asset-liability matching framework. Within thisframework, the Group’s objective is to match plan assets to To enable consistent, proactive and effective management of the post-employment beneﬁts in line with its business strategy and values, the SKF Group established a Global Pension Committee, agovernance body who is responsible to align post-employment beneﬁts to SKF Global Pension Policy. SKF Global Pension Policy sets out principles for managing SKF´s pension and other long- term employee beneﬁts within SKF globally. NOTES GROUP 82 SKF Annual Report 2021 Sensitivity analysis of signiﬁcant assumptions Change in actuarial assumption Impact on deﬁned beneﬁt obliga- tions, MSEK Discount rate +1% –3,758 –1% 4,902 Salary growth rate +0.5% 475 –0.5% –446 Pension increase rate +0.5% 1,188 –0.5% –1,019 Longevity +1 year 1,137 –1 year –1,131 2021 Signiﬁcant weighted-average assumptions at end of year USA pension USA medical Germany pension U.K. pension Sweden pension Other Discount rate 2.7 2.6 1.2 1.8 1.5 1.3 Pension increase rate 1) n/a n/a 3.0 3.3 1.8 n/a Salary growth rate 2) n/a n/a 2.2 3.3 3.1 3.2 Longevity male/female 3) 20.6/22.5 20.5/22.5 20.4/23.9 21.9/24.3 22.1/24.9 21.0/24.0 Weighted average duration of the plan (in years) 4) 10.1 9.4 18.5 19.1 21.2 10.7 2020 Signiﬁcant weighted-average assumptions at end of year USA pension USA medical Germany pension U.K. pension Sweden pension Other Discount rate 2.5 2.3 0.6 1.3 1.1 1.1 Pension increase rate 1) n/a n/a 2.0 2.9 1.8 n/a Salary growth rate 2) n/a n/a 2.7 2.9 3.1 3.0 Longevity male/female 3) 20.5/22.4 20.4/22.4 20.2/23.6 21.6/23.6 22.2/24.6 19.9/22.9 Weighted average duration of the plan (in years) 4) 11.2 9.4 20.3 20.1 22.2 10.6 1) Pension increase rate refers to indexation primarily tied to inﬂation. 2) Salary growth rate for the U.S. pension is n/a as no additional service cost will be accrued for these plans. 3) Longevity is expressed as the life expectancy of a current 65 year old in number of years. 4) Represents the average number of years remaining until the obligation is paid out. n/a = assumptions not applicable or not signiﬁcant for the plan. Accounting policy In general, a provision is recognized when there is a present obliga- tion as a result of a past event, it is probable that an outﬂow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognized as provisions is management’s best estimate of the future cash ﬂows necessary to settle the obligations at the balance sheet date, and the timing of settlement is uncertain. Claims include both provisions for litigation and warranties, and represent management’s best estimate of the future cash ﬂows necessary to settle obligations. Other long-term employee beneﬁts refer to beneﬁts earned and expected to be settled before employ- ment ends. These provisions are calculated using the projected unit credit method and remeasurements (actuarial gains and losses) are recognized immediately in the income statement. Restructuring programmes are deﬁned as activities that materially change the way a unit does business. Any related restructuring provisions are recognized when a detailed formal plan has been established and a public announcement of the planhas occurred thereby creating a valid expectation that the plan willbe carried out. When an obligation does not meet the criteria for recognition it may be considered a contingent liability and disclosed. Contingent liabilities represent possible obligations whose existence will be conﬁrmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. They also include existing obligations where it is not probable that an outﬂow of resources is required, or the outﬂow cannot be reliably quantiﬁed. Cont. Note 18 The sensitivity analysis is based on the change in one assumption while holding all other assumptions constant, see notes to previous table. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity analysis of the DBO to changes in assumptions the same method has been applied as when calculating the pension liability recognized within the obligation. The sensitivity analysis considers the most signiﬁcant plans inthe U.S., Germany, U.K. and Sweden, and it has been prepared consistently with prior years. 19 Other provisions and contingent liabilities thepension obligations by investing in securities with maturities that align with the beneﬁt payments as they fall due and in the appropriate currency. SKF Treasury Centre regularly monitors howthe duration and the expected yield of the investments are matching the expected cash outﬂows arising from the pension obligations. Final investment decisions are taken by the local subsidiary/trustee together with SKF Treasury Centre. 83 SKF Annual Report 2021 automotive aftermarket in Brazil. As per management judgement, these investigations did not qualify for recognition as other provi- sions or contingent liabilities. Warranty provisions involve estimates of the outcome of claims resulting from defective products, which include estimates for potential liability for damages caused by such defects to the Group’s customers. Assumptions are required for anticipated returns and for cost for replacing defective products and/or compensating customers for damage caused by the Group’s products. These assumptions consider historical claims statistics, expected costs to remedy and the average time lag between faults occurring and claims against the Group. Restructuring provisions involve estimates of the timing and cost of the planned future activities where the most signiﬁcant estimates relates to the costs necessary to settle employee severance/sepa- ration obligations, as well as the costs involved in contract cancella- tions and other exit costs. These estimates are based on historical experience as well as the current status of negotiations with the affected parties and/or their representatives. MSEK 2021 Closing balance Provisions for the year Utilized amounts Reversal unutilized amounts Other Translation effect 2021 Opening balance Claims 263 107 –143 –88 86 5 296 Other employee beneﬁts 990 391 –296 –511 37 18 1,351 Restructuring 824 419 –633 –142 –2 40 1,142 Other 440 189 –94 –222 –144 18 693 Total 2,517 1,106 –1,166 –963 –23 81 3,482 MSEK Of which current Claims 102 Other employee beneﬁts 48 Restructuring 771 Other 184 Total 1,105 Accounting estimates and judgements Signiﬁcant management judgement is required in determining the existence and amount of provisions. As the estimates may involve uncertainty about future events outside the control of the Group, the actual outcomes may be signiﬁcantly different. Claims include both provisions for litigation and warranties, and represent management’s best estimate of the future cash ﬂows necessary to settle obligations, although the timing of the settlement is uncertain. Provisions for litigation are based on the nature of the litigation, the legal process in the applicable jurisdiction, the pro- gress of the cases, the opinions of internal and external legal coun- sel and advisers regarding the outcome of the case and experience with similar cases. Tax claims in different countries and in different stages of the claim that do not meet the deﬁnition of tax liability are recognized as contingent liabilities. SKF is part of investigations regarding possible violations of anti-trust rules, class action claims and lawsuits. SKF is subject to an investigation in Brazil by the General Superintendence of the Administrative Council for Economic Defense, regarding an alleged violation of antitrust rules by several companies active on the Claims decreased during 2021 with MSEK –33, related to warranty claims. In 2021, the total restructuring cost amounted to around MSEK466, whereof MSEK 419 refers to provisions, and includes theconsolidation of factories in North America and Europe as well as a general reduction in headcount driven by new ways of working and simpliﬁed organizational structures. This cost includes volun- tary and involuntary termination beneﬁts spread over several countries. The majority of the remaining restructuring provisions are expected to be settled in 2022 and 2023. The largest items in other employee beneﬁts are jubilee bonus inItaly, part-time retirement programmes in Germany and special payroll tax in Sweden. Other provisions primarily include insurance and worker’s compensation as well as environmental commitments. Contingent liabilities at nominal values (MSEK) 2021 2020 Guarantees 47 10 Tax claims 347 1,124 Other contingent liabilities 28 23 Total 422 1,157 NOTES GROUP 84 SKF Annual Report 2021 Accounting policy Financial liabilities are recognized in the balance sheet when the Group becomes a party to the contractual provisions of a ﬁnancial instrument. Financial liabilities are initially recorded at fair value, which is normally equal to acquisition cost. Transaction costs are included in the initial measurement of ﬁnancial liabilities that are not subsequently measured at fair value through the income state- ment. Derivatives are recognized at trade date. Financial liabilities, excluding derivatives, are classiﬁed as Other ﬁnancial liabilities measured at amortized cost. Amortized cost is measured using the effective interest method. The carrying amount of liabilities that are hedged items, for which fair value hedge accounting is applied, are adjusted for gains or losses attributable to the hedged risks. Derivatives are classiﬁed into the category Fair value through proﬁt or loss. Financial liabilities are derecognized when they are extinguished. Accounting estimates and judgements For disclosure purposes, fair values of ﬁnancial liabilities have been calculated using valuation techniques, mainly discounted cash ﬂow analyses based on observable market data. 2021 2020 MSEK Maturity Carrying amount Fair value Carrying amount Fair value Long-term ﬁnancial liabilities MEUR 296 2022 — — 2,963 3,096 MSEK 900 2024 899 922 897 939 MSEK 2,100 2024 2,097 2,153 2,096 2,174 MEUR 300 2025 3,118 3,143 3,127 3,151 MUSD 100 2027 905 1,057 817 1,018 MEUR 300 2029 3,057 3,243 2,993 3,332 MEUR 300 2031 3,019 3,079 — — Long-term lease liabilities 2022 and thereafter 2,179 2,179 2,024 2,024 Other long-term loans 2022–2028 181 197 172 172 Derivatives held for hedge accounting 18 18 — — Derivatives held for trading — — — — Subtotal long-term ﬁnancial liabilities 15,473 15,991 15,089 15,906 Short-term ﬁnancial liabilities MEUR 200 2021 — — 2,006 2,005 MEUR 296 2022 3,031 3,094 — — Trade payables 2022 9,881 9,881 8,459 8,459 Short-term lease liabilities 2022 579 579 560 560 Short-term loans 2022 147 147 169 169 Derivatives held for hedge accounting 2022 — — — — Derivatives held for trading 2022 106 106 525 525 Subtotal short-term ﬁnancial liabilities 13,744 13,807 11,719 11,718 Total 29,217 29,798 26,808 27,624 Derivatives are measured at fair value and fall into Level 2 of the fair value hierarchy. See Note 14 for a description of the fair value hierarchy. The maturities for bonds and loans stated in the table above are based on the earliest date on which they can be required to be repaid. One of the loans is subject to fair value hedging. The ﬁxed EUR interest on the MEUR 300 loan has been swapped into ﬂoating USD interest rate. Part of the long-term loan, MEUR 30 of outstanding MEUR 296 with due date 2022 has been designated as hedge instrument in net investment hedges of foreign operations. The fair value of this ﬁnancial liability amounted to MSEK 317 (317) as of the balance sheet date. More information regarding ﬁnancial risk management and hedge accounting can be found in Note 26. Methods used for establishing fair value are described in Note 14. Interest rates for the loans are disclosed in Note 11 of the Parent Company. The Group does not have any pledged assets to secure ﬁnancial liabilities. 20 Financial liabilities 85 SKF Annual Report 2021 MSEK 2021 2020 Employee related accruals 3,366 2,356 Accrual for rebates 1,270 935 Income tax payable 972 1,027 Deferred income 245 256 Customer advances 315 520 Value added taxes payable, net 640 937 Other current liabilities 834 804 Other accrued expenses 2,033 1,681 Total 9,675 8,516 FAM is a privately owned holding company that manages assets as an active owner with a long-term ownership horizon. FAM is owned by Wallenberg Investments AB, which is owned by the three larg- est Wallenberg foundations – the Knut and Alice Wallenberg Foun- dation, the Marianne and Marcus Wallenberg Foundation and the Marcus and Amalia Wallenberg Foundation. TheFoundations have, since 1917, granted funding to excellent researchers and research projects beneﬁcial to Sweden, primarily to Swedish universities. The SKF Group has had no indication that FAM has obtained its ownership interest in the Group for other than investment purposes. No signiﬁcant transactions have been identiﬁed between the parties with the exception of dividend paid during the year to FAM. Atthe end of 2021 FAM is the major shareholder of the Parent Company, holding 29.3% (29.5) of the voting rights and 14.0% (13.8) of the share capital. Investments in associated companies include a 25% shareholding of Simplex Turbolo Co. Ltd. i Storbritannien, a 28% shareholdning of Sunstrength Renewables Pvt Ltd. i Indien, a 42% shareholding of Ningbo Hyatt Roller Co. Ltd i Kina, a 20% shareholding of Colinx, LLC in USA, a 50% shareholding of Wuhan Economos seals technol- ogy Co., Ltd. in Kina, and a 25% shareholding of Schwarz GmbH Technischer Großhandel in Germany. Transactions with Associated companies (MSEK) 2021 2020 Sales of goods and services 55 53 Purchases of goods and services 437 328 Receivables as of 31 December 37 7 Liabilities as of 31 December 50 32 Other related party transactions include remuneration to key manage ment as speciﬁed in Note 23. For a list of signiﬁcant sub sidiaries, see Note 8 to the ﬁnancial statements of the Parent Company. 21 Other short-term liabilities 22 Related parties including associated companies NOTES GROUP 86 SKF Annual Report 2021 Salaries and other remunerations for SKF Board of Directors, President and Group Management Principles of remuneration for Group Management In March 2020, the Annual General Meeting adopted the Board’s proposal for principles of remuneration for Group Management, which are summarized below. Group Management is deﬁned as the President and the other members of the management team. The principles shall apply to remuneration agreed and amendments to remuneration already agreed, after the adoption of the principles by the Annual General Meeting 2020, and, in other cases, to the extent permitted under existing agreements. The objective of the principles is to ensure that the SKF Group can attract and retain the best people in order to contribute to the SKF Group’s mission and business strategy, its long-term interests and sustainability. Remuneration for Group Management shall be based on market competitive conditions and at the same time support the shareholders’ best interests. The total remuneration package for a Group Management mem- ber shall consist of the following components: ﬁxed salary, variable salary, pension beneﬁts, conditions for notice of termination and severance pay, and other beneﬁts such as a company car. The com- ponents shall create a well-balanced remuneration reﬂecting indi- vidual performance and responsibility as well as the SKF Group’s overall performance. The Annual General Meeting also, irrespective of the principles ofremuneration for Group Management, resolved on SKF’s Performance Share Programme 2021 for senior managers and keyemployees, where Group Management is included. For more information on SKF’s Performance Share Programme 2021, seepage 88. Fixed salary The ﬁxed salary of a Group Management member shall be at a market competitive level. It shall be based on competence, respon- sibility, experience and performance. The SKF Group shall use aninternationally well-recognized evaluation system, in order to evaluate the scope and responsibility of the position. Market bench- marks shall be conducted on a yearly basis. The performance of Group Management members shall be con- tinuously monitored during the year and shall be used as a basis for annual reviews of ﬁxed salaries. Variable salary The variable salary of a Group Management member shall run according to a performance-based programme. The purpose of the programme shall be to motivate and compensate value-creating achievements in order to support operational and ﬁnancial targets and thereby promote the SKF Group’s business strategy, sustaina- bility and long-term interests. The performance-based programme shall have predetermined and measurable criteria including both ﬁnancial and non-ﬁnancial targets. The criteria shall primarily be based on the annual ﬁnancial performance of the SKF Group, such as TVA, cash ﬂow and indivi- dual goals. The satisfaction of criteria for awarding variable salary shall be measured over a period of one year. If the ﬁnancial performance 23 Remuneration to key Management of the SKF Group is not in line with the requirements of the performance-based programme, no variable salary will be paid. The maximum variable salary shall vary between 50 to 70% of the accumulated annual ﬁxed salary of Group Management members. Other beneﬁts The SKF Group may provide other beneﬁts to Group Management members in accordance with local practice. Premiums and other costs relating to such beneﬁts shall depend on and follow local conditions and local practice but shall represent, as a general rule, alimited value and may amount to not more than 10% of theﬁxed salary of the members of Group Management. Other beneﬁts can for instance be a company car or health and medical insurance. Pension The SKF Group shall strive to establish pension plans based on deﬁned contribution models, which means that a premium is paid amounting to a certain percentage of the employee’s annual salary. The commitment in these cases is limited to the payment of an agreed premium to an insurance company offering pension insurance. A Group Management member is normally covered by, in addi- tion to the basic pension (for Swedish members usually the ITP pension plan), a supplementary deﬁned contribution pension plan. By offering this supplementary deﬁned contribution plan, it is ensured that Group Management members are entitled to earn pension beneﬁts based on the ﬁxed annual salary above the level ofthe basic pension. The normal retirement age for Group Manage- ment members shall be 65 years. For employments governed by rules other than Swedish, pension beneﬁts and other beneﬁts may be duly adjusted for compliance with mandatory rules or established local practice, taking into account, to the extent possible, the overall purpose of the principles. For employments governed by Swedish rules, the premium for the supplementary pension plan shall be linked to age and amount to amaximum of 40% of the ﬁxed annual salary not covered by any other pension plan. Notice of termination and severance pay A Group Management member may terminate his/her employment by giving six months’ notice. In the event of termination of employ- ment at the request of the company, employment shall cease imme diately. The Group Management member shall however receive a severance payment related to the number of years’ of service, provided that it shall always be maximized to two years’ ﬁxed salary. Salary and terms of employment for employees When preparing the principles, the Board of Directors has paid regard to the salary and terms of employment of the employees of the company. Information about employees’ total remuneration, the components of the remuneration and the growth and growth rate over time have been part of the basis for the Board of Direc- tor’s and the Remuneration Committee’s evaluation of the fairness of the principles of remuneration and the limitations which the principles entail. 87 SKF Annual Report 2021 The decision-making process to determine, review and implement the principles The Board of Directors has established a Remuneration Committee. The Committee consists of a maximum of four Board members. The Remuneration Committee prepares all matters relating to the principles of remuneration for Group Management, as well as the terms of employment for the President. The principles of remuneration for Group Management are pre- sented by the Remuneration Committee to the Board of Directors that, at least every fourth year, submits a proposal for such princi- ples to the Annual General Meeting for approval. The principles of remuneration shall be valid until new principles have been adopted by the Annual General Meeting. The Board of Directors must approve the terms of employment for the President. The Remuner- ation Committee shall also monitor and evaluate programmes for variable remuneration for Group Management, the application of the principles of remuneration for Group Management and applica- ble remuneration structures and levels of the SKF Group. The members of the Remuneration Committee are independent of the SKF Group and Group Management. The President and other members of Group Management shall not be present when the Board of Directors process and resolve on remuneration related matters in so far as they are affected by such matters. The Board of Directors’ right to derogate from the principles of remuneration The Board of Directors may derogate from the principles of remu- neration decided by the Annual General Meeting, in whole or in part, if in a speciﬁc case there is special cause for the derogation and a derogation is necessary to serve the SKF Group’s long-term interests, including its sustainability, or to ensure the SKF Group’s ﬁnancial viability. As set out above, the Remuneration Committee’s tasks include preparing the Board of Directors’ resolutions in remuneration related matters. This includes any resolutions to derogate from the guidelines. Board of Directors The Chairman of the Board and the Board members are remuner- ated in accordance with the decision taken at the Annual General Meeting. At the Annual General Meeting of AB SKF held in 2021 it was decided that the Board should be paid fees according to the following: – an allotment of SEK 2,300,000 to the Chairman of the Board and with SEK 750,000 to each of the other Board members; and – an allotment of SEK 260,000 to the Chairman of the Audit Committee, with SEK 190,000 to each of the other members of the Audit Committee, with SEK 150,000 to the Chairman of the Remu- neration Committee and with SEK 120,000 to each of the other members of the Remuneration Committee. A prerequisite for obtaining an allotment is that the Board member is elected by the Annual General Meeting and not employed by the company. President and Chief Executive Ofﬁcer Rickard Gustafson, President and Chief Executive Ofﬁcer of AB SKF has received remuneration from the company during 2021 governed by the remuneration principles decided upon by the Annual General Meeting 2020; salary and other remunerations amounted to a total of SEK 8,277,590 of which SEK 8,277,590 was ﬁxed annual salary and other beneﬁts. Alrik Danielson, former President and Chief Executive Ofﬁcer of AB SKF, has received remuneration from the company in year 2021 in accordance with the remuneration principles; salary and other remunerations amounted to a total of SEK 26,791,643 of which SEK 11,435,433 was ﬁxed annual salary and other beneﬁts includ- ing ﬁnal salary, SEK 8,497,310 was severence payment, SEK 2,551,500 was variable salary related to 2020 year’s performance, and SEK 4,310,400 was alottment of shares under the Perfor- mance Share Programme 2018. The pension arrangement for Rickard Gustafson and Alrik Danielson is a combination of the ITP scheme and a deﬁned contribution of 40% of the annual ﬁxed salary above 30 income base amounts. Niclas Rosenlew has received remuneration from the company during 2021 speciﬁcally for his assignment as acting Chief Execu- tive Ofﬁcer in accordance with the remuneration principles; salary and other remunerations amounted to a total of SEK 458,333 of which SEK 458,333 was ﬁxed annual salary. The pension arrange- ment is a combination of the ITP scheme and a deﬁned contribution of 35% of the annual ﬁxed salary above 30 income base amounts. Rickard Gustafson’s shareholdings (own and/or held by related parties) in the company as well as material shareholdings or other holdings (own and/or held by related parties) in companies with which the company has important business relationships are listed in the Corporate Governance Report. Group Management The SKF’s Group Management, consisting of 10 people at the end ofthe year, received in 2021 (exclusive of the President) salary and other remunerations amounting to a total of SEK 61,388,439 of which SEK 40,418,297 was ﬁxed annual salary, SEK 11,316,173 was variable salary related to 2020 year’s performance, and SEK 9,653,969 was alottment of shares under the Performance Share Programme 2018. The variable salary for Group Management was according to a short-term performance-based programme primarily based on theﬁnancial performance of the SKF Group with criteria such as operating proﬁt and cash ﬂow. SKF’s Performance Share Programmes are further described onpage 88. In the event of termination of employment at the request of the company of a person in Group Management, that person will receive a severance payment amounting to a maximum of two years’ salary. For Group Management the Board has decided on a deﬁned contribution supplementary pension plan. The plan entitles Group Management members covered to receive an additional pension over and above the basic pension (for Swedish members usually the ITP pension plan). The contributions paid for Group Manage- ment members covered by the deﬁned contribution plan are based on each individual’s pensionable salary (normally the ﬁxed monthly salary excluding holiday pay, converted to yearly salary) exceeding the level of the basic pension (for Swedish members 30 income base amounts). Group Management members are never covered by both deﬁned beneﬁt pension and deﬁned contribution pension for the same part of their pension entitlements. The normal retirement age is 65 years. NOTES GROUP 88 SKF Annual Report 2021 Cont. Note 23 SKF’s Performance Share Programme Performance Shares The Annual General Meeting 2021 decided on the introduction ofSKF’s Performance Share Programme 2021. The programme covers a maximum of 225 senior managers and key employees in the SKF Group, including Group Management, with the opportunity of being allotted, free of charge, SKF shares of series B. The number of shares that may be allotted is related to the degree of achievement of the TVA target level, as deﬁned by the Board of Directors, for the ﬁnancial years 2021–2023 compared to the ﬁnancial year 2020. Under the programme, no more than 1,000,000 SKF shares of series B, may be allotted. The allocation of shares is based on the level of TVA increase. Inorder for allocation of shares to take place the TVA increase must exceed a certain minimum level (the threshold level). In addition tothe threshold level a target level is set. Maximum allotment is awarded if the target level is reached or exceeded. Provided that the TVA increase reaches the target level, the partic ipants of the programme may be allotted the following maxi- mum number of shares per person within the various key groups: • CEO and President: 30,000 shares • Other members of Group Management: 13,000 shares • Managers of large business units and similar: 4,500 shares • Other senior managers: 3,000 shares • Other key persons: 1,250 shares Before the number of shares to be allotted is ﬁnally determined, the Board shall examine whether the allotment is reasonable con- sidering SKF’s ﬁnancial results and position, the conditions on the stock market as well as other circumstances, and if not, as deter- mined by the Board, reduce the number of shares to be awarded to the lower number of shares deemed appropriate by the Board. If the TVA increase exceeds the threshold level for allotment ofshares but the ﬁnal allotment is below 5% of the target level, payment will be made in cash instead of shares, whereupon the amount of the cash payment shall correspond to the value of the shares calculated on the basis of the closing price for SKF’s B share the day before settlement. Fixed salary and other beneﬁts 1) /ﬁxed Board remuneration Short-term variable salary Performance Share Programmes Remuneration for committee work Gross pension costs 2) Amounts in SEK Amounts paid in 2021 3) Amounts expensed in 2021 3) Amounts paid in 2021 related to 2020 3) Amounts expensed in 2021 3) Amounts paid in 2021 related to prior years 3) Amounts expensed in 2021 3) Amounts paid in 2021 3) Amounts expensed in 2021 3) Amounts expensed in 2021 3) Total expensed in 2021 Total expensed in 2020 Board of directors of AB SKF Hans Stråberg 2,216,500 2,300,000 — — — 340,000 340,000 — 2,640,000 2,454,000 Hock Goh 741,000 750,000 — — — — — — 750,000 732,000 Ronnie Leten 366,000 — — — — — — — — 1,022,000 Barb Smardzich 741,000 750,000 — — — — — — 750,000 732,000 Colleen Repplier 741,000 750,000 — — — 120,000 120,000 — 870,000 732,000 Geert Follens 741,000 750,000 — — — 190,000 190,000 — 940,000 732,000 Håkan Buskhe 741,000 750,000 — — — 380,000 380,000 — 1,130,000 1,094,000 Susanna Schneeberger 741,000 750,000 — — — — — — 750,000 732,000 CEO 8 ,277,590 9,286,670 — 2,8 61,369 — 2,265,000 — — 3,041,959 17,454,998 43,600,153 4) Former CEO 19,929,743 5) 6,159,121 2,551,500 1,922,467 4,310,400 1,448,400 — — 2,134,932 11,664,920 — Former acting CEO 6) 458,333 458,333 — 145,000 — — — — 160,417 763,750 — Group Management 7) 8) 40,418,297 42,543,138 11,316,173 16,090,429 9,653,969 16,292,019 — — 11,8 31,882 86,757,468 85,158,098 whereof AB SKF 20,586,860 22,71 1,701 5,593,214 8,356,071 7, 327,684 13,383,334 — — 11,126,889 55,577,995 54,926,251 Total 2021 76,112,463 65,247,261 13,867,673 21,019,266 13,964,369 20,005,419 1,030,000 1,030,000 17,169,190 124,471,136 — whereof AB SKF 56,281,026 45,165,824 8,144,714 13,284,908 11,638,084 17,096,734 1,030,000 1,030,000 16,464,197 93,291,663 — Total 2020 67,554, 84 0 91,295,937 19,688,41 7 16,278,933 21,529,382 5,843,699 973,000 973,000 22,596,682 — 136,988,251 whereof AB SKF 49,113,190 72,854,287 11,972,178 6,083,348 18,886,984 6,536,234 973,000 973,000 20,309,535 — 106,756,404 1) Other beneﬁts include for example company car and medical insurance. 2) Represents premiums paid under deﬁned contribution plans as well as gross service costs under deﬁned beneﬁt plans. 3) Amounts paid represent the cash outﬂow and are amounts received by the individual during a speciﬁc calendar year. These amounts include remunera- tion for services rendered during given calendar year such as salary, but can also include remuneration for services rendered in a prior year where pay- ment occurs subsequent to that year, for example the variable salary pro- grammes. Amounts expensed refer primarily to the costs for the Group for services rendered during a speciﬁc calendar year by the individual, butcan also include adjustments or reversals related to prior years. Consequently, differences between amounts paid and amounts expensed can arise as timing of the expense can be occurring in a different calendar year than the cash outﬂow tothe individual. 4) The total expense refers to the previous CEO. Includes maximum severance payment of SEK 20,438,000, which will be in the range of SEK 6,812,000 to SEK 20,438,000 depending on any other income from new employment or any other business activity which will be deducted from the maximum amount. 5) Includes severence payment of MSEK 8,497,310. 6) Compensation speciﬁcally for the assignment as acting CEO. Niclas Rosenlew’s ordinary compensation as CFO is not included in the amount. 7) Total pension obligations, for SKF Group, related to Group Management (including CEO) were MSEK 134. 8) Exclusive of CEO. 89 SKF Annual Report 2021 Fees to the SKF Group statutory auditors were split as follows (MSEK) 2021 2020 Deloitte Audit fees 50 — Where of Deloitte AB 10 — Audit related fees 2 — Where of Deloitte AB 2 — Tax fees 7 — Where of Deloitte AB 2 — Other fees 3 — Where of Deloitte AB 2 — PricewaterhouseCoopers Audit fees 1 47 Where of PricewaterhouseCoopers AB — 11 Audit related fees — 1 Where of PricewaterhouseCoopers AB — 1 Tax fees 0 9 Where of PricewaterhouseCoopers AB — 0 Other fees — 1 Where of PricewaterhouseCoopers AB — 0 63 58 The Parent Company’s share (MSEK) 2021 2020 Deloitte Audit fees 7 — Audit related fees 2 — Tax fees 1 — Other fees to auditors 1 — PricewaterhouseCoopers Audit fees — 9 Audit related fees — 1 Tax fees — 0 Other fees to auditors — 0 11 10 Audit fees related to examination of the annual report and ﬁnancial reporting and the administration by the Board and the President as well as other tasks related to the duties of a company auditor. Audit related fees are mainly attributable to the review of the SKF’s sus- tainability report. Tax fees related to tax consultancy and tax com- pliance services. All other assignments were deﬁned as other. 24 Fees to the auditors The share-based compensation programmes of the Group are mainly equity-settled through the SKF Group’s Perform ance Share programmes. The fair value of the SKF B share at grant date is calculated as the market value of the share excluding the present value of expected dividend payments for the next three years. The estimated cost for these programmes, which is based on thefair value of the SKF B share at grant date and the number of shares expected to vest, is recognized as an operating expense with a corresponding offset in equity. The fair value of the SKF shares ofseries B at grant date was determined as SEK 226,5 forSKF’s Perfor mance Share Programme 2021. The dividend compensation amount is recognized as employee beneﬁt expense separate from the share-based compensation expense. The cost for the programmes is adjusted annually for changes to the number of shares expected to vest and for the forfeitures of the participants’ rights that no longer satisfy the programme conditions. Provisions for social costs to be paid by the employer in connection with share-based compensation programmes are calculated based on the fair value of the SKF B share at each reporting date and expensed over the vesting period. Allotment of shares under SKF’s Performance Share Programme requires that the persons covered by each of the programmes are employed in the SKF Group during the entire three year calculation period. SKF’s Performance Share Programme 2018: Allotment of shares was made in February 2021. In total 392,883 SKF class B shares were allotted pursuant to the terms of the programme, based on the degree of achievement of TVA during the three year period 2018–2020. SKF’s Performance Share Programme 2019: Allotment of shares was made in February 2022. In total 200,010 SKF class B shares were allotted pursuant to the terms of the programme, based on the degree of achievement of TVA during the three year period 2019–2021. SKF’s Performance Share Programme 2020: Allotment of shares may be made following the expiry of the three year calculation period, i.e. during 2023, if all the conditions of the programme are met and the allotment is approved by the Board. SKF’s Performance Share Programme 2021: Allotment of shares may be made following the expiry of the three year calculation period, i.e. during 2024, if all the conditions of the programme are met and the allotment is approved by the Board. Amounts expensed 2021 for all programmes were MSEK 95 (26) excluding social charges. The total provision for all programmes was MSEK 106 (89) and the total provision for social charges for all programmes was MSEK 27 (25). 2021 2020 Men and women in Board of Directors and Group Management Number of persons Whereof men Number of persons Whereof men The Group Board of Directors of the Parent company incl. CEO 8 63% 9 67% Group Management incl. CEO 10 80% 10 80% Parent Company Board of Directors of the Parent company incl. CEO 8 63% 9 67% Group Management incl. CEO 8 75% 8 75% NOTES GROUP 90 SKF Annual Report 2021 The Group’s overall ﬁnancial objective is to create value for its shareholders. Over time, the return on the shareholders’ invest- ment in the SKF share should exceed the risk-free interest rate by around six percentage points. This is the basis for the Group’s long-term ﬁnancial objectives and the ﬁnancial performance manage ment model. The SKF Group deﬁnes its managed capital as the capital employed. One of the Group’s long term ﬁnancial targets is to achieve a return on capital employed of 16%. The capital structure target of the Group is • a gearing of around 50%, which corresponds to • an equity/assets ratio of around 35% or • a net debt/equity ratio, excluding pension liabilities of below 40%. Key ﬁgures 1) 2021 2020 Total equity, MSEK 45,365 35,712 Gearing, % 40.5 48.0 Equity/assets ratio, % 45.5 39.4 Net debt/equity ratio, excluding post- employment beneﬁts, % 12.5 9.3 Adjusted Return on capital employed 2) , % 14.9 12.7 1) Deﬁnition of these key ﬁgures is available on page 154. 2) Adjusted for items affecting comparability. The purpose of the targeted capital structure is to keep an appro- priate balance between equity and debt ﬁnancing. This will ensure ﬁnancial ﬂexibility and enable the Group to continue investing in its business while maintaining a strong credit rating. The Group’s policy and structure of debt ﬁnancing are presented below. The SKF Group’s operations are exposed to various types of ﬁnancial risks; market risks (being currency risk, interest rate risk and other price risks), liquidity risks and credit risks, each being discussed below. The Group’s risk management incorporates a ﬁnancial policy that establishes guidelines and deﬁnitions of currency, interest rate, credit and liquidity risks and establishes responsibility and authority for the management of these risks. The policy states that the objective is to eliminate or minimize risk and to contribute to a better return through the active management of risks. The management of the risks and the responsibility for all treasury operations are largely centralized at SKF Treasury Centre, the Group’s internal bank. The policy sets forth the ﬁnancial risk mandates and the ﬁnancial instruments authorized for use in the management of ﬁnancial risks. Financial derivative instruments are used prim arily to manage the Group’s exposure to ﬂuctuations in foreign currency exchange rates and interest rates. The Group also uses ﬁnancial derivative instru- ments for trading purposes, according to Group policy. 26 Financial risk management 2021 2020 Number of employees Whereof men,% Number of employees Whereof men,% Parent Company in Sweden 689 66 691 68 Subsidiaries in Sweden 1,900 81 1,846 80 Subsidiaries abroad 38,272 76 35,848 79 40,861 75 38,385 78 Geographic speciﬁcation of average number of employees in subsidiaries abroad 2021 2020 Number of employees Whereof men,% Number of employees Whereof men,% France 2,197 82 1,995 82 Italy 3,039 70 3,074 78 Germany 5,142 88 4,842 88 Other Western Europe excluding Sweden 3,163 83 3,136 84 Central and Eastern Europe 4,301 65 3,811 64 USA 3,677 74 3,660 76 Canada 192 80 174 76 Mexico 1,649 69 1,349 71 Latin America 3,303 88 2,947 89 China 6,390 69 5,851 67 India 2,730 95 2,421 95 Other Asian countries/Paciﬁc 2,104 82 2,230 81 Middle East and Africa 385 69 358 76 38,272 76 35,848 79 25 Average number of employees 91 SKF Annual Report 2021 Market risk – Currency risk The Group is exposed to changes in exchange rates in the future ﬂows of payments related to ﬁrm commitments and forecasted transactions and to loans and investments in foreign currencies, i.e. transaction exposure. The Group’s accounts are also affected bytranslating the results and net assets of foreign subsidiaries intoSEK, i.e. translation exposure. Transaction exposure Transaction exposure mainly arises as a result of intra-Group trans actions between the Group’s manufacturing companies and the Group’s sales companies, situated in other countries and selling the products to end-customers normally in local currency on their local market. In some countries, transaction exposure may arise from sales to external customers in a currency different from the local currency. The Group’s principal commercial ﬂows of foreign currencies pertain to exports from Europe to North America and Asia and to ﬂows of currencies within Europe. Currency rates and payment conditions to be applied to the internal trade between SKF companies are set by SKF Treasury Centre. Currency exposure and risk is primarily, and to a large extent, reduced by netting internal transactions. The currency ﬂows between SKF companies managed by SKF Treasury Centre were reduced through netting from MSEK 70,357 (58,341) to MSEK 6,594 (4,538). This amount represented the Group’s main transaction exposure excluding hedges. Net currency ﬂows (MSEK) 2021 2020 CAD 747 621 CNY 2,666 2,803 DKK 626 444 EUR –6,833 –7,194 RUB 958 719 THB 427 462 TRY 909 761 USD 5,331 4,245 Other 1) 1,763 1,677 SEK –6,594 –4,538 1) Other is a sum comprising 11 different currencies. Based on the assumption that the net currency ﬂows will be the same as in 2021, the below graph represents a sensitivity analysis that shows the effect in SEK on operating proﬁt of a 5% weaker SEK against all other currencies. The effect on equity is the below result after tax. The effects of ﬂuctuations upon the translation of subsidiaries’ ﬁnancial state- ments into the Group’s presentation currency are not considered. Translation exposure Translation exposure is deﬁned as the Group’s exposure to currency risk arising when translating the results and net assets of foreign subsidiaries to SEK. Based on 2021 operating proﬁts in local currencies, the below graph represents a sensitivity- analysis that shows the effect in SEK on the translation of operating proﬁts of a 5% weaker SEK against all other currencies. To reduce the transla- tion exposure of net assets, the Group has hedged some of its net investment in foreign subsidiaries, for details see pages 92 –93. Effect of translation on operating proﬁts to SEK of a 5% weaker SEK 0 40 80 200 M SEK 160 120 INRGBP Other 1) USDCNY EUR 1) Other is a sum comprising 47 different currencies. Market risk – Interest rate risk The Group deﬁnes interest rate risk as the risk of negative ﬂuctua- tions in the Group’s cash ﬂow caused by changes in the interest rates. At year-end, total interest bearing ﬁnancial liabilities amounted to MSEK 30,923 (32,960) and total interest-bearing ﬁnancial assets amounted to MSEK 14,374 (15,210). Liquidity management is concentrated to SKF Treasury Centre. By matching the duration of investments and borrowings, the interest rate exposure of the Group can be reduced. To manage the interest rate risk and currency risk in the bor- rowing, the Group uses cross-currency interest rate swaps, where ﬁxed EUR interest rates are swapped into ﬂoating USD and ﬂoating EUR interest rates are swapped into ﬂoating USD. As of the balance sheet date, given the prevailing amount of net interest-bearing liabilities, an unfavourable change of the interest rates by 1% would have reduced pre-tax proﬁt for the year, includ- ing the effect of derivatives, by around MSEK –70 (65). For details on interest rates of individual loans, see Note 11 of the Parent Company’s ﬁnancial statements. Market risk – Price risks Market risks also include other price risks, where the relevant risk variables for the Group are stock exchange prices or indexes. As of 31 December, the Group held investments in equity securi- ties with quoted stock prices, amounting to MSEK 402 (301), which are categorized as fair value through other comprehensive income. If the market share prices had been 5% higher/lower at the balance sheet date, the available- for-sale reserve in equity would have been MSEK 20 (15) higher/lower. −400 −300 −200 −100 0 200 100 THBRUBEUR USDTRYCAD DKKCNY Effect of transactional currency ﬂows on operating proﬁts of a 5% weaker SEK 300 MSEK Other 1) 1) Other is a sum comprising 11 different currencies. NOTES GROUP 92 SKF Annual Report 2021 Liquidity risk Liquidity risk, also referred to as funding risk, is deﬁned as the risk that the Group will encounter difﬁculties in raising funds to meet commitments. Group policy states that, in addition to current loan ﬁnancing, the Group should have a payment capacity in the form of available liquidity and/or long-term committed credit facilities. Asof the balance sheet date, in addition to its own liquidity, the Group had unutilzed committed credit facilities of MEUR 500 syn- dicated by ten banks that will expire in 2025, and one unutilized committed credit facilities of MEUR 250 that will expire in 2022. A good rating is important in the management of liquidity risks. As of 31 December 2021 the long-term rating of the Group is Baa1 by Moody’s Investors Service and BBB+ by Fitch Ratings, both with stable outlook. The table below shows the Group’s contractually agreed and undiscounted interest payments and repayments of the non- derivative ﬁnancial liabilities and derivatives with payment ﬂows. All instruments held on 31 December 2021 for which payments were contractually agreed were included. Planning data for future, new liabilities was not included. Amounts in foreign currency were translated at closing rate. The variable interest payments arising from the ﬁnancial instruments were calculated using the last inter- est rates ﬁxed before 31 December 2021. Financial liabilities were assigned to the earliest possible time period when they can be required to be repaid. 2021 Cash ﬂows MSEK 2022 2023 2024–2026 2027 and thereafter Loans –3,249 –222 –6,508 –7,104 Trade payables –9,881 — — — Derivatives, net 5 — –18 — Lease liabilities –587 –447 –853 –1,036 Total –13,712 –669 –7,379 –8,140 Credit risk Credit risk is deﬁned as the Group’s exposure to losses in the event that one party to a ﬁnancial instrument fails to discharge an obliga- tion. The SKF Group is exposed to credit risk from its operating activities and certain ﬁnancing activities. The maximum exposure to credit risk for the Group amounted to MSEK 28,440 (27,928) as of the balance sheet date. The exposure is represented by total ﬁnancial assets that are carried on the bal- ance sheet with the exception of equity securities. No granting of signiﬁcant ﬁnancial guarantees increasing the credit risk and no signiﬁcant collateral agreements reducing the maximum exposure to credit risk existed as of the balance sheet date. Credit risk (MSEK) 2021 2020 Trade receivables 13,972 12,286 Other receivables 1,155 1,160 Derivatives 94 432 Cash and cash equivalent 13,219 14,050 Total 28,440 27,928 At operational level, the outstanding trade receivables are conti- nuously monitored locally in each area. The Group’s concentration of credit risk related to trade receivables is mitigated primarily due to its many geographically and industrially diverse customers. Trade receivables are subject to credit limit control and approval procedures in all subsidiaries. With regard to treasury related activities, the Group’s policy states that only well-established ﬁnancial institutions are approved as counterparties. The SKF Group has signed ISDA agreements (International Swaps and Derivatives Association, Inc.) with nearly all of these ﬁnancial institutions. ISDA is classiﬁed as an enforceable netting arrangement. One feature of the ISDA agreement is that it enables the SKF Group to calculate its credit exposure on a net basis per counterpart, i.e. the difference between what the Group owes and is owed. The agreement between the Group and the counter- party allows for net settlement of derivatives when both elect to settle net. In the event of default of one of the counterparties the other counterpart of the netting agreement has the option to settle on a net basis. Transactions are made within ﬁxed limits and credit exposure per counterparty is continuously monitored. As of the balance sheet date the Group had derivative assets of around MSEK94 (425) and derivative liabilities of around MSEK 117 (513) subject to enforceable master netting arrangements. Hedge accounting The Group manages risks related to the volatility of balance sheet items and future cash ﬂows, which otherwise would affect the income statement, by hedging. A distinction is made between cash ﬂow hedges, fair value hedges and hedges of net investment in foreign operations based on the nature of the hedged item. Derivative instruments which provide effective economic hedges, but are not designated for hedge accounting by the Group, are accounted for as trading instruments. Changes in the fair value of these economic hedges are immediately recognized in the income statement as ﬁnancial income or expense or in the operating result depending on the nature of the hedged item. Fair value hedges Hedge accounting is applied to derivative ﬁnancial instruments which are effective in hedging the exposure to changes in fair value in foreign borrowing. Changes in the fair value of these derivative ﬁnancial instruments designated as hedging instruments are recognized in the income statement under ﬁnancial items. The carrying amount of the hedged item (the ﬁnancial liability) is adjusted for the gain or loss attributable to the hedged risk. The gain or loss is recognized in the income statement under ﬁnancial items. If a hedge relationship is discontinued, the accumulated adjustment to the carrying amount is amortized over the duration of the life of the hedged item. The SKF Group hedges the fair value risk of ﬁnancial liabilities on December 2021, by using cross-currency interest rate swap. The MEUR 300 loan with ﬁxed interest payments has been swapped into ﬂoating USD interest. Maturity and carrying amount are disclosed in Note 20. The effectiveness of the hedging relation- ship is measured at inception of the hedge relationship and pro- spectively to ensure that the economic relationship between hedge item and hedging instrument remains. When the effectiveness was being measured, the change in the credit spread was not taken into account for calculating the change in the fair value of the hedged item. As the list of the fair values of derivatives shows (see table in the Derivatives section below), the Group had designated interest rate derivatives for a net amount of MSEK –18 (295) as fair value hedges as of 31 December 2021. Cont. Note 26 93 SKF Annual Report 2021 The following table shows the changes in the fair value of the hedges recorded in interest expense during the year. MSEK Financial expense 2021 Financial expense 2020 Financial liabilities (hedged items) 70 –4 Cross-currency interest-rate swaps (hedging instruments) –69 3 Difference (inefﬁciency) 1 –1 Hedges of net investments Hedge accounting is applied to ﬁnancial instruments which are effective in offsetting the exposure to translation differences aris- ing when the net assets of foreign operations are translated into the Group’s functional currency. Any gain or loss on the hedging is recognized in the foreign currency translation reserve via other comprehensive income. As of the balance sheet date net investments in foreign opera- tions for a nominal amount of MEUR 30 (30) were hedged by the Group against changes in the EUR/SEK exchange rates. EUR loan for an amount of MEUR 30 (30) and derivatives for an amount of MEUR 0 (0) were designated as hedge instruments. The result of the hedges totalled MSEK –6 (–36) before tax in 2021 and was recognized as a translation difference in other com- prehensive income. During the year no gains/losses (0) have been recycled from other comprehensive income to the income state- ment, matching the recycling of the hedged subsidiary’s cumulative translation differences. Derivatives The table below shows the fair values of the various derivatives carried as of 31 December reﬂected as assets in Note 14 and liabilities in Note 20. A distinction is made depending on whether these are part of an effective hedging relationship or not. Derivative net (MSEK) Category 2021 2020 Interest rate and currency swaps Fair value hedges Hedge accounting –18 295 Economic hedges Trading — –242 Currency forwards/ currency options Economic hedges Trading –11 –148 Share swaps Economic hedges Trading — 2 –29 –93 January–December Summarized income statement (MSEK) 2021 2020 Net sales 3,973 2,944 Operating proﬁt 675 451 Net income 435 321 Other comprehensive income 161 –349 Total comprehensive income 596 –28 Proﬁt allocated to NCI 206 152 Dividends paid to NCI –40 –355 Accounting policy Subsidiaries that the Group controls, but owns less than 100% in, are consolidated into the Group’s ﬁnancial statements. The cate- gory “non-controlling interests (NCI)” in the equity report accumu- lates the portion of a subsidiary’s equity that is not attributable to the owners of AB SKF. There is uncertainty about how and to which extent SKF’s opera- tions will be affected by the ongoing conﬂict in Ukraine. SKF operates in both Ukraine and Russia with approximately 1,100 and250employees, respectively. Sales in Ukraine amount to less than 0,5%of SKFs total sales and sales in Russia amount to approxi- mately 2%of SKFs total sales. SKFs factory in Lutsk, Ukraine accounts for a production volume of about 1% of SKFs totalproduction volume. At the time of 27 Non-controlling interests 28 Subsequent events Signiﬁcant non-controlling interests During 2021, there has been no change in signiﬁcant non-controlling interests. The largest non-controlling interest is SKF India Ltd. Thenon-controlling interests holds a 47.4% (47.4) shareholding in the company. This represents 2.2% (2.2) of the Group’s total equity. The tables below present the summarized ﬁnancial information of SKFIndia Ltd. publication of this report (2 March 2022), the factory in Ukraine is closed due to prevailing circum stances. SKF is currently evaluating the extent of the impact on the supply of raw materials from this area. To reduce exposure SKF has taken measures to replace parts of of the raw material supply from the region. As of 31 December Summarized balance sheet (MSEK) 2021 2020 Non-current assets 608 539 Current assets 2,627 1,851 Total assets 3,235 2,390 Equity attributable to shareholders of AB SKF 1,123 853 Equity attributable to NCI 1,013 770 Non-current liabilites 45 31 Current liabilities 1,054 736 Total equity and liabilities 3,235 2,390 PARENT COMPANY INCOME STATEMENTS 94 SKF Annual Report 2021 Parent Company income statements Parent Company statements of comprehensive income January–December MSEK Note 2021 2020 Revenue 2 7,775 5,267 Cost of revenue 2 –5,036 –4,819 General management and administrative expenses 2 –1,470 –1,489 Other operating income and expenses, net 2 0 13 Operating proﬁt 1,269 –1,028 Financial income and expenses, net 3 2,325 2,271 Proﬁt after ﬁnancial items 3,594 1,243 Appropriations 4 –793 1,070 Proﬁt before tax 2,801 2,313 Income taxes 5 –54 30 Net proﬁt 2,747 2,343 January–December MSEK Note 2021 2020 Net proﬁt 2,747 2,343 Items that may be reclassiﬁed to the income statement Assets at fair value through other comprehensive income 9 95 –40 Other comprehensive income, net of tax 95 –40 Total comprehensive income 2,842 2,303 AB SKF, corporate identity number 556007-3495, which is the Parent Company of the SKF Group, is a registered Swedish limited liability company domiciled in Gothenburg. The headquarters’ address is AB SKF, SE-415 50 Gothenburg, Sweden. AB SKF is the Entrepreneur within the Group. The role of Entre- preneur is to make the strategic decisions and pay for research and development in the Group as well as the management services. Subsidiaries in the Group perform tasks decided by the Entrepreneur and thus have a limited commercial liability. Dividend income from consolidated subsidiaries amounted to MSEK 2,010 (2,878). Net investments in subsidiaries decreased by MSEK –421 (58) whereof MSEK –60 (–490) is attribuatble to impairments and MSEK 70 (279) related to capital contributions. Shares with abooked value of MSEK –354 ( 0) were sold during the year. Parent Company, AB SKF Risks and uncertainties in the business for the Group are de scribed in the Administration Report for the Group. The ﬁnancial position of the Parent Company is dependent on the ﬁnancial posi- tion and development of the subsidiaries. A general decline in the demand for the products and services provided by the Group could mean lower residual proﬁt and lower dividend income for the Parent Company, as well as a need for write-down of the values in the shares in subsidiaries. Due to the wide spread of markets, geographically as well as operationally in which the subsidiaries operate, the risk that the ﬁnancial position for the Parent Company will be negatively affected is assessed as small. Unrestricted equity in the Parent Company amounted to MSEK 23,627. 95 SKF Annual Report 2021 Parent Company balance sheets As of 31 December MSEK Note 2021 2020 ASSETS Non-current assets Intangible assets 6 1,371 1,528 Property, plant and equipment 7 63 83 Investments in subsidiaries 8 22,074 22,496 Long-term receivables from subsidiaries 13,022 12,749 Investments in equity securities 9 349 253 Other long-term receivables 167 334 Deferred tax assets 5 312 301 37,358 37,744 Current assets Short-term receivables from subsidiaries 6,958 5,971 Other short-term receivables 140 70 Prepaid expenses and accrued income 130 91 Cash and cash equivalents 3 2 7,231 6,134 Total assets 44,589 43,878 EQUITY AND LIABILITIES Equity Restricted equity Share capital 1,138 1,138 Statutory reserve 918 918 Capitalized development reserve — 99 2,056 2,155 Unrestricted equity Fair value reserve 163 68 Retained earnings 20,717 21,235 Net proﬁt 2,747 2,343 23,627 23,646 25,683 25,801 Untaxed reserves 4 — — Provisions Provisions for post-employment beneﬁts 10 430 431 Other provisions 15 37 445 468 Non-current liabilities Long-term loans 11 13,023 12,750 13,023 12,750 Current liabilities Short-term loans 11 3,031 2,005 Trade payables 320 180 Short-term liabilities to subsidiaries 1,488 2,135 Other short-term liabilities 132 151 Accrued expenses and deferred income 467 388 5,438 4,859 Total shareholders’ equity and liabilities 44,589 43,878 PARENT COMPANY BALANCE SHEETS 96 SKF Annual Report 2021 PARENT COMPANY STATEMENTS OF CASH FLOW Parent Company statements of cash ﬂow January–December MSEK Note 2021 2020 Operating activities Operating loss/proﬁt 1,269 –1,028 Adjustments for Depreciation, amortization and impairments 6, 7 202 206 Impairments equity securities 8 60 490 Other non-cash items 1) 66 –366 1) Payments under post-employment deﬁned beneﬁt plans 10 –36 –28 Changes in working capital Trade payables 140 –175 Other operating assets and liabilities, net –2,394 –684 Interest received 203 235 Interest paid –252 –301 Other ﬁnancial items 404 –139 Net cash ﬂow from operating activities –338 –1,790 Investing activities Additions to intangible assets 6 –112 1) — Additions to property, plant and equipment 7 –4 –13 Sales of property, plant and equipment 7 17 — Dividends received from subsidiaries 3 2,010 2,878 Investments in subsidiaries 8 –464 –548 Sales of shares in subsidiaries 8 354 — Capital repayments from subsidiaries 8 472 — Investments in equity securities 9 –1 –4 Net cash ﬂow used in investing activities 2,272 2,313 Net cash ﬂow after investments before ﬁnancing 1,934 523 Financing activities Proceeds from medium- and long-term loans 3,045 3,000 Repayment of medium- and long-term loans –2,018 –2,163 Cash dividends to AB SKF’s shareholders –2,960 –1,366 Net cash ﬂow used in ﬁnancing activities –1,933 –529 Increase(+)/decrease(–) in cash and cash equivalents 1 –6 Cash and cash equivalents at 1 January 2 8 Cash and cash equivalents at 31 December 3 2 1) Includes intangible assets of MSEK 112 paid in 2021. 97 SKF Annual Report 2021 Parent Company statements of changes in equity Restricted equity Unrestricted equity MSEK Share capital 1) Statutory reserve Capitalized development reserve Fair value reserve Retained earnings Total Opening balance 1 January 2020 1,138 918 273 108 22,522 24,959 Net proﬁt — — — — 2,343 2,343 Components of other comprehensive income Change in assets to fair value through other comprehensive income — — — –40 — –40 Capitalized development reserve — — –174 — 174 — Transactions with shareholders Cost under Performance Share Programmes 2) — — — — –95 –95 Dividends — — — — –1,366 –1,366 Closing balance 31 December 2020 1,138 918 99 68 23,578 25,801 Net proﬁt — — — — 2,747 2,747 Components of other comprehensive income Change in assets to fair value through other comprehensive income — — — 95 — 95 Capitalized development reserve — — –99 — 99 0 Transactions with shareholders Cost under Performance Share Programmes 2) — — — — — — Dividends — — — — –2,960 –2,960 Closing balance 31 December 2021 1,138 918 0 163 23,464 25,683 1) The distribution of share capital between share types and the quota value is shown in Note 16 to the Consolidated ﬁnancial statements. 2) See Note 23 to Consolidated ﬁnancial statements for information about Performance Share Programmes. Restricted equity includes share capital and statutory reserves as well as capitalized development reserves which are not available for dividend payments. Unrestricted equity includes retained earnings which can be distributed to shareholders. It also includes the fair value reserve which accumulates the changes in fair value of available-for-sale assets. PARENT COMPANY STATEMENTS OF CHANGES IN EQUITY 98 SKF Annual Report 2021 NOTES PARENT COMPANY Notes to the ﬁnancial statements of the Parent Company Basis of presentation The ﬁnancial statements of the Parent Company are prepared in accordance with the “Annual Accounts Act” and The Swedish Financial Reporting Board recommendation RFR 2, “Accounting for Legal Entities” as well as their interpretation (UFR). In accordance with RFR 2, IFRS is applied to the greatest extent possible under Swedish legislation, but full compliance is not possible. The areas inwhich the Parent Company’s accounting policies differ from the Group’s are described below. For a description of the Group’s accounting policies, see Note 1 to the Consolidated ﬁnancial statements. Post-employment beneﬁts AB SKF reports pensions in the ﬁnancial statements in accordance with RFR 2. According to RFR 2, IAS 19 shall be adopted regarding supplementary disclosures when applicable. Investments in subsidiaries Investments in subsidiaries are recorded at acquisition cost, reduced by any impairment. Untaxed reserves The tax legislation in Sweden allows companies to make pro visions to untaxed reserves. Hereby, the companies may, with certain limits, allocate and retain proﬁts in the balance sheet instead of immediate taxation. The untaxed reserves are taken into taxation at the time of their dissolution. In the event that the business shows losses, the untaxed reserves may be dissolved in order to cover the losses without any taxation. Equity When development expenses are capitalized for internal develop- ment of intangible assets, a corresponding amount is transferred from retained earnings to a reserve for capitalized development in restricted equity. The reserve is released to retained earnings upon amortization of the capitalized development. Intangible assets According to Swedish legislation, goodwill has a deﬁnite useful life. The useful life amounts to eight years and the amortization follows a linear pattern. Leases RFR 2 allows an exception from IFRS 16 which the Parent Company has applied. Lease contracts are reported as operational leases. AB SKF is since 2012 the entrepreneur within the Group and as such entitled to the residual proﬁts while taking the costs for management and research and development. Consequently the revenues are comprised of residual proﬁts and royalties from MSEK 2021 2020 Income from participations in Group companies Dividends from subsidiaries 2,010 2,878 Other ﬁnancial income from investments in subsidiaries 483 — Impairment and disposals of investments in subsidiaries –60 –490 2,433 2,388 Financial income Interest income from subsidiaries 203 235 Other ﬁnancial income — 8 203 243 Financial expenses Interest expenses to subsidiaries –73 –84 Interest expenses to external parties –202 –242 Other ﬁnancial expense –36 –34 –311 –360 subsidiaries. Cost of revenue include research and development expenses totalling MSEK 2,501 (2,221). Of the total operating expenses, MSEK 3,782 (3,336) was invoiced from subsidiaries. Appropriations (MSEK) 2021 2020 Paid/received group contribution –793 1,070 Untaxed reserves Change in accelerated depreciation reserve — — –793 1,070 Untaxed reserves in the balance sheet Accelerated depreciation reserve — — 1 Accounting policies 2 Revenues and operating expenses 3 Financial income and ﬁnancial expenses 4 Appropriations 99 SKF Annual Report 2021 Taxes on proﬁt before tax (MSEK) 2021 2020 Current taxes — — Other taxes 11 93 Deferred tax –65 –63 –54 30 Net deferred assets per type net (MSEK) 2021 2020 Provisions for post-employment beneﬁts 126 97 Tax credit carry forwards 186 190 Tax loss carry forwards — — Other — 14 Deferred tax assets 312 301 MSEK 2021 Closing balance Additions Impairments Derecognitions 2021 Opening balance Acquisition cost Goodwill 35 — — — 35 Technology, Intellectual property and similar items 1,013 — — — 1,013 Internally developed software 2,290 38 — — 2,252 3,338 38 — — 3,300 MSEK 2021 Closing balance Amortization Impairments Derecognitions 2021 Opening balance Accumulated amortization Goodwill 25 5 — — 20 Technology, Intellectual property and similar items 925 16 — — 909 Internally developed software 1,017 174 — — 843 1,967 195 — — 1,772 Net book value 1,371 1,528 MSEK 2020 Closing balance Additions Impairments Derecognitions 2020 Opening balance Acquisition cost Goodwill 35 — — — 35 Technology, Intellectual property and similar items 1,013 112 — — 901 Internally developed software 2,252 — — — 2,252 3,300 112 — — 3,188 MSEK 2020 Closing balance Amortization Impairments Derecognitions 2020 Opening balance Accumulated amortization Goodwill 20 5 — — 15 Technology, Intellectual property and similar items 909 16 — — 893 Internally developed software 843 174 — — 669 1,772 195 — — 1,577 Net book value 1,528 1,611 6 Intangible assets 5 Taxes Reconciliation of the statutory tax in Sweden andthe actual tax (MSEK) 2021 2020 Tax calculated using the statutory tax rate in Sweden –577 –495 Non-taxable dividends and other ﬁnancial income 526 617 Tax referring to previous years 23 36 Other non-deductible and non-taxable proﬁt items, net –26 –128 Actual tax –54 30 The corporate statutory income tax rate in Sweden is 20.6% (21.4). See Note 10 to the Consolidated ﬁnancial statements for information on the internally developed software including impairment. Technology and similar items are amortized over eight years. 100 SKF Annual Report 2021 MSEK 2021 Closing balance Additions Disposals 2021 Opening balance Acquisition cost Buildings 5 — — 5 Machine toolings and factory ﬁttings 81 — — 81 Assets under construction including advances 27 4 –17 40 113 4 –17 126 MSEK 2021 Closing balance Depreciation Disposals 2021 Opening balance Accumulated depreciation Buildings 3 — — 3 Machine toolings and factory ﬁttings 47 7 — 40 50 7 — 43 Net book value 63 83 MSEK 2020 Closing balance Additions Disposals 2020 Opening balance Acquisition cost Buildings 5 — — 5 Machine toolings and factory ﬁttings 81 3 –18 95 Assets under construction including advances 40 10 –3 34 126 13 –21 134 MSEK 2020 Closing balance Depreciation Disposals 2020 Opening balance Accumulated depreciation Buildings 3 1 — 2 Machine toolings and factory ﬁttings 40 7 –18 51 43 8 –18 53 Net book value 83 81 Investments in subsidiaries held on 31 December (MSEK) 2021 Additions Impairment Disposals and capital repayments 2020 Additions Impairment Disposals and capital repayments 2019 Investments in subsidiaries 22,074 464 –60 –826 22,496 548 –490 — 22,438 The Group is composed of 183 legal entities (subsidiaries), where AB SKF is the ultimate parent either directly or indirectly via inter- mediate holding companies. The vast majority of the Group’s sub- sidiaries perform activities related to manufacturing and sales. Alimited number are involved in central Group functions such as treasury or reinsurance, or as previously mentioned, act as inter- mediate holding companies. This legal structure is designed to effectively manage legal requirements, administration, ﬁnancing and taxes in the countries in which the Group operates. In contrast, the Group’s operational structure described in the Administration Report, gives a better overview of how the Group runs its business. See also Note 2 to the Consolidated ﬁnancial statements. The tables below list ﬁrstly, the subsidiaries owned directly by the Parent Company, and secondly, the most signiﬁcant of the remaining subsidiaries of the Group. Taken together these subsidi- aries account for more than 90% of the Group’s sales and for more than 90% of the Group’s manufacturing facilities. Book value (MSEK) Name of directly owned subsidiaries Country/Region Registration number No. of shares % ownership 2021 2020 Main activities 1) SKF Argentina S.A. Argentina — 14,677,299 29.2 2) 94 75 M,S SKF Australia Pty. Ltd. Australia — 96,500 100 — — S SKF Österreich AG Austria — 200 100 176 176 M,S SKF Belgium NV/SA Belgium — 1,778,642 99.9 2) 109 109 S 7 Property, plant and equipment 8 Investments in subsidiaries NOTES PARENT COMPANY 101 SKF Annual Report 2021 Book value (MSEK) Name of directly owned subsidiaries Country/Region Registration number No. of shares % ownership 2021 2020 Main activities 1) Carried Forward 379 360 SKF Logistics Services Belgium NV/SA Belgium — 29,907,952 99.9 2) 28 28 O SKF do Brasil Ltda. Brazil — 517,294,748 99.9 2) 626 626 M,S SKF Bearings Bulgaria EAD Bulgaria — 24,664,309 100 202 183 M,S SKF Bulgaria Ltd Bulgaria — — — — 19 S SKF Canada Ltd. Canada — 130,000 100 58 58 M,S SKF Chilena S.A.I.C. Chile — 88,191 99.9 2) — — S SKF (China) Co. Ltd. China — 133,400 100 1,135 1,135 O SKF China Ltd. China — 11,000,000 100 15 15 S SKF CZ, a.s. Czech Republic — 430 100 10 10 S SKF Danmark A/S Denmark — 5 100 7 7 S Oy SKF Ab Finland — 48,400 100 12 12 M,S SKF Holding France S.A.R.L. France — 1 100 3,371 3,371 O SKF GmbH Germany — 1,000 100 1,573 1,573 M,S SKF Lubrication Systems Germany GmbH Germany — 2,574 10,1 2) 223 223 M,S SKF Maintenance service GmbH Germany — — — — 6 S SKF Hellas S.A. Greece — 2,000 100 — — S SKF Svéd Golyóscsapágy Zrt Hungary — 20 100 — — S SKF Engineering and Lubrication India Private Ltd. India — 1,196,450 52.8 2) 314 314 M,S SKF India Ltd. India — 22,666,055 45.8 3) 87 87 M,S PT. SKF Indonesia Indonesia — 53,411 60 26 24 M,S PT. SKF Industrial Indonesia Indonesia — 5 96.3 2) 1 1 S SKF AI Ltd Israel — 2,413,322 100 220 220 S SKF Industrie S.p.A Italy — 465,000 100 912 912 M,S SKF Japan Ltd. Japan — 32,400 100 174 196 S SKF Malaysia Sdn Bhd Malaysia — 1,000,000 100 57 57 S SKF de México, S.A. de C.V. Mexico — 375,623,529 99.9 2) 204 204 M,S SKF New Zealand Ltd. New Zealand — 375,000 100 11 11 S SKF Norge AS Norway — 50,000 100 — — S SKF del Peru S.A. Peru — 2,564,903 99.9 2) — — S SKF Philippines Inc. Philippines — 8,395 100 20 20 S SKF Financial Services Poland sp.zoo Poland — 100 100 30 14 O SKF Polska S.A. Poland — 3,701,466 100 156 156 M,S SKF Portugal-Rolamentos, Lda. Portugal — 61,601 95 2) 4 4 S SKF Korea Ltd. Republic of Korea — 128,667 100 74 74 M,S SKF Sealing Solutions Korea Co., Ltd. Republic of Korea — 153,320 51 15 15 M,S SKF Treasury Centre Asia & Paciﬁc Pte. Ltd. Singapore — — 100 — 467 O SKF Asia Paciﬁc Pte. Ltd. Singapore — 1,000,000 100 — — S Barseco (PTY) Ltd. South Africa — 1,422,480 100 157 157 O SKF Española S.A. Spain — 3,650,000 100 383 383 M,S SKF Förvaltning AB Sweden 556350-4140 124,500 99.6 2) 4,144 4,144 O SKF HQ AB Sweden 559250-5027 — — — — O SKF International AB Sweden 556036-8671 20,000 100 1,320 1,320 O Återförsäkringsaktiebolaget SKF Sweden 516401-7658 30,000 100 125 125 O Bagaregården 16:7 KB Sweden 916622-8529 — 99.9 2) 99 66 O SKF Eurotrade AB Sweden 556206-7610 83,500 100 12 12 S SKF Lager AB Sweden 556219-5288 2,000 100 — — O AB Svenska Kullagerfabriken Sweden 556210-0148 1,000 100 — — O The Waste Company Sweden AB Sweden 559128-2016 50,000 100 — — O SKF Efolex AB Sweden 559233-1275 2,500 100 31 — M,S SKF Edge AB Sweden 556785-4640 1,000 100 9 — S SKF Verwaltungs AG Switzerland — 500 100 502 502 O SKF Taiwan Co. Ltd. Taiwan — 169,475,000 100 102 139 S SKF (Thailand) Ltd. Thailand — 1,847,000 92.4 2) 37 37 S SKF B.V the Netherlands — 1,450 100 304 304 S SKF Holding Maatschappij Holland B.V. the Netherlands — 60,002 100 423 423 O Trelanoak Ltd. United Kingdom — 6,965,000 100 120 120 O PSC SKF Ukraine Ukraine — 1,267,495,630 100 207 207 M,S SKF USA Inc. USA — 1,000 100 4,155 4,155 M,S SKF Venezolana S.A. Venezuela — 20,014,892 100 — — O 22,074 22,496 1) M=Manufacturing, S=Sales, O=Other incl treasury, reinsurance and/or holding activities. 2) Parent Company together with subsidiares own 100%. 3) Parent Company together with subsidiaries own 52.6%. 102 SKF Annual Report 2021 Name of indirectly owned subsidiaries Country/Region % Ownership Owned by subsidiary in Main activities 1) Alemite LLC USA 100 USA M,S Beijing Nankou SKF Railway Bearings Co. Ltd. China 51 China M,S BFW Coupling Services Ltd. Canada 100 Canada S Cooper Roller Bearings Co. Ltd. United Kingdom 100 United Kingdom M Industrial Tectonics Inc. USA 100 USA M,S Kaydon Corporation USA 100 USA M,S Kaydon Precision Components (Suzhou) Co. Ltd. China 100 USA M Kaydon S de R.L. de C.V. Mexico 100 the Netherlands M Lincoln Industrial Corporation USA 100 USA M,S Lincoln Lubrication Mocambique LDA Mocambique 100 South Africa S Lincoln Lubrication (SA) Pty Ltd. South Africa 100 South Africa S M3M S.A.S France 100 France M Ningbo General Bearing Ltd. China 100 Barbados M,S PEER Bearing Company USA 100 USA S PEER Bearing Company, Changshan (CPZ1) China 100 China M RKS S.A.S France 100 France M Shanghai Peer Bearing Co. Ltd. Shanghai China 100 China S SKF (China) Sales Co. Ltd. China 100 China S SKF (Dalian) Bearings and Precision Technologies Co. Ltd. China 100 China M SKF (Jinan) Bearings & Precision Technology Co. Ltd. China 100 China M SKF (Schweiz) A.G. Switzerland 100 Switzerland S SKF (Shanghai) Automotive Technologies Co. Ltd. China 100 China M SKF (U.K.) Ltd. United Kingdom 100 United Kingdom M,S SKF (Xinchang) Bearings and Precision Technologies China 100 China M SKF (Zambia) Ltd. Zambia 100 Sweden S SKF Aeroengine France S.A.S France 100 France M,S SKF Aerospace France S.A.S. France 100 France M,S SKF Bearing Industries (Malaysia) Sdn Bhd Malaysia 100 the Netherlands M SKF Distribution (Shanghai) Co. Ltd. China 100 China S SKF Economos Deutschland GmbH Germany 100 Austria S SKF France S.A.S France 100 France M,S SKF Industrial Service Shanghai Co. Ltd. China 66 China S SKF Latin Trade S.A.S Colombia 100 Chile S SKF LLC Russian Federation 100 Sweden M,S SKF Lubrication Systems CZ s.r.o Czech Republic 100 Germany M SKF Magnetic Mechatronics S.A.S France 100 France M,S SKF Marine GmbH Germany 100 Germany M,S SKF Marine Singapore Pte Ltd. Singapore 100 Germany S SKF Mekan AB Sweden 100 Sweden M SKF Metal Stamping S.R.L Italy 100 Italy M,S SKF RecondOil AB Sweden 100 Sweden M,S SKF Sealing Solutions Austria GmbH Austria 100 Austria M,S SKF Sealing Solutions GmbH Germany 100 Germany M,S SKF Sealing Solutions (Qingdao) CO. China 100 Austria M,S SKF Sealing Solutions (Wuhu) Co. Ltd. China 100 China M,S SKF Sealing Solutions S.A. de C.V. Mexico 100 USA M,S SKF Seals Italy S.p.A. Italy 100 Italy M SKF Slovensko, spol. S.r.o. Slovenia 100 Sweden S SKF South Africa (Pty) Ltd. South Africa 70 South Africa S SKF Steyr Liegenschaftsvermietungs GmbH Austria 100 Austria O SKF Sverige AB Sweden 100 Sweden M,S SKF Türk Sanayi ve Ticaret Limited Sirketi Turkey 100 Belgium S SKF Uruguay S.A Uruguay 100 Argentina S SKF Vietnam Co. Ltd. Vietnam 100 Singapore S Stewart Werner Corporation of Canada Canada 100 USA S Venture Aerobearings LLC. USA 51 USA M,S Vesta Si Sweden AB Sweden 100 Sweden M 1) M=Manufacturing, S=Sales, O=Other incl treasury, reinsurance and/or holding activities. Cont. Note 8 NOTES PARENT COMPANY 103 SKF Annual Report 2021 Name and location (MSEK) Holding in percent Number of shares Currency 2021 Book value 2020 Book value Wafangdian Bearing Company Limited, China 19.7 79,300,000 HKD 332 237 Other SEK 17 16 349 253 Amount recognized in the balance sheet (MSEK) 2021 2020 Present value of funded pension obligations 546 510 Fair value of plan assets –313 –275 Net obligation 233 235 Present value of unfunded pension obligations 197 196 Net provisions 430 431 Change in net provision for the year (MSEK) 2021 2020 Opening balance 1 January 431 378 Deﬁned beneﬁt expense 35 81 Pension payments –36 –28 Closing balance 31 December 430 431 Components of expense (MSEK) 2021 2020 Pension cost 56 76 Interest expense 17 16 Return on plan assets –38 –11 Deﬁned beneﬁt expense 35 81 Deﬁned contribution expense 119 105 Total post-employment beneﬁt expense 154 186 All white collar workers of the Company are covered by the ITP- plan according to collective agreements. Additionally, the Company sponsors a complementary deﬁned contribution (DC) scheme for a limited group of managers. This DC scheme replaced the previous supplementary deﬁned beneﬁt plan which from 2003 is closed for new participants. The calculation of deﬁned beneﬁt pension obligations has been made in accordance with regulations stipulated by the Swedish Financial Supervisory Authority, FFFS 2007:24 and FFFS 2007:31. The discount rate for the ITP-plan was 3.84% (3.84) and for the other deﬁned beneﬁt plan it was 0.39% (1.45). Next year’s expected cash outﬂows for pension obligations are MSEK 160. 9 Investments in equity securities 10 Provisions for post-employment beneﬁts In January 2022 the Swedish pension assumptions are updated, the discount rate, the life expectancy and the consolidation reserv. The net effect on AB SKFs pension liability will be a sustantial increase. 104 SKF Annual Report 2021 Salaries, wages, other remunerations, average number of employees and men and women in Management and Board 12 2021 2020 MSEK Maturity Interest rate Carrying amount Fair value Carrying amount Fair value Bonds MEUR 200 2021 0.15 — — 2,005 2,005 MEUR 296 2022 1.63 3,031 3,094 2,963 3,096 MSEK 900 2024 1.13 899 922 897 939 MSEK 2,100 2024 0.89 2,097 2,153 2,096 2,174 MEUR 300 2025 1.25 3,046 3,143 2,984 3,151 MUSD 100 2027 4.06 905 1,057 817 1,018 MEUR 300 2029 0.88 3,057 3,243 2,993 3,332 MEUR 300 2031 0.25 3,019 3,079 — — 16,054 16,691 14,755 15,715 MSEK 2021 1) 2020 Salaries, wages and other remuneration 798 768 Social charges (whereof post- employment beneﬁt expense) 466 (154) 444 (186) 1) 2021 includes cost of MSEK 59 related to 2020s short-term variable salary programme. See Note 23 to the Consolidated ﬁnancial statements for informa- tion on remuneration to the Board and President as well as men and women in management and the Board. Refer to Note 25 to theConsolidated ﬁnancial statements for the average number of employees and to Note 24 to the Consolidated ﬁnancial statements for fees to the auditors. 11 Loans 13 Contingent liabilities MSEK 2021 2020 General partner 4 1 Other contingent liabilites 24 22 28 23 General partner relates to liabilities in limited partnership Bagaregården 16:7. Other contingent liabilities refer to guarantee commitment regarding pension liabilities in the Swedish subsidiaries. NOTES PARENT COMPANY 105 SKF Annual Report 2021 Proposed distribution of surplus Fair value reserve SEK 162,583,341 Retained earnings SEK 20,716,903,273 Net proﬁt for the year SEK 2,747,066,008 Total sur plus SEK 23,626,552,622 The Board of Directors and the President recommend to the shareholders, a dividend of SEK 7.00 per share 1) SEK 3,187,457,476 2) to be carried forward: Fair value reserve SEK 162,583,341 Retained earnings SEK 20,276,511,805 SEK 23,626,552,622 The results of operations and the ﬁnancial position of the Parent Company, AB SKF, and the Group for the year 2021 are given in the income statements and in the balance sheets together with related notes. The Board of Directors and the President certify that the annual ﬁnancial report has been prepared in accordance with generally accepted accounting principles in Sweden and that the consolidated accounts have been prepared in accordance with the international set of accounting standards referred to in Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, and give a true and fair view of the position and proﬁt or loss of the Company and the Group, and that the management report for the Company and for the Group gives a fair review of the development and performance of the business, position and proﬁt or loss of the Company and the Group, and describes the principal risks and uncertainties that the Company and the companies in the Group face. Gothenburg, 2 March 2022 Hans Stråberg, Chairman Hock Goh, Board member Barb Samardzich, Board member Colleen Repplier, Board member Geert Follens, Board member Håkan Buskhe, Board member Susanna Schneeberger, Board member Rickard Gustafson, President and CEO, Board member Jonny Hilbert, Board member Zarko Djurovic, Board member Our auditors’ report for this Annual Report and the consolidated Annual Report was issued 2 March 2022. Deloitte AB Hans Warén Authorized Public Accountant 1) Suggested record day for right to dividend, 28 March 2022. 2) Board Members’ statement: The members of the Board are of the opinion that the proposed dividend is justiﬁable considering the demands on Company and Group equity imposed by the type, scope and risks of the business and with regards to the Company’s and the Group’s ﬁnancial strength, liquidity and overall position. PROPOSED DISTRIBUTION OF SURPLUS 106 SKF Annual Report 2021 AUDITOR’S REPORT Auditor’s report To the general meeting of the shareholders of AB SKF (publ) corporate identity number 556007-3495 Report on the annual accounts and consolidated accounts Opinions We have audited the annual accounts and consolidated accounts of AB SKF (publ) for the ﬁnancial year 2021-01-01–2021-12-31. Theannual accounts and consolidated accounts of the company areincluded on pages 14–105 in this document. In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the ﬁnancial position of the parent company as of 31 December 2021 and its ﬁnancial performance and cash ﬂow for the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the ﬁnancial position of the group as of 31 December 2021 and their ﬁnancial performance and cash ﬂow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts. We therefore recommend that the general meeting of share- holders adopts the income statement and balance sheet for the parent company and the group. Our opinions in this report on the annual accounts and consoli- dated accounts are consistent with the content of the additional report that has been submitted to the parent company’s audit com- mittee in accordance with the Audit Regulation (537/2014) Article 11. Basis for Opinions We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibility section. We are independ- ent of the parent company and the group in accordance with pro- fessional ethics for accountants in Sweden and have otherwise fulﬁlled our ethical responsibilities in accordance with these require- ments. This includes that, based on the best of our knowledge and belief, no prohibited services referred to in the Audit Regulation (537/2014) Article 5.1 have been provided to the audited company or, where applicable, its parent company or its controlled compa- nies within the EU. We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our opinions. Other information The audit of the annual accounts for the ﬁscal year 2020-01-01 –2020-12-31 was performed by another auditor who signed the audit report 2 March 2021 without exceptions in the Annual Report. Key Audit Matters Key audit matters of the audit are those matters that, in our pro- fessional judgment, were of most signiﬁcance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters. Valuation of Goodwill As of 31 December 2021, AB SKF (publ) accounts for goodwill in the consolidated balance sheet amounting to MSEK 10 924. The value of the goodwill is dependent on future income and proﬁtabil- ity in the cash-generating units, to which the goodwill refers, and isassessed for impairment at least once a year. Management bases its impairment test on several judgements and estimates such as growth, EBIT development and cost of capital (WACC) as well as other complex circumstances. Incorrect judgements and estimates may have a signiﬁcant impact on the group’s result and ﬁnancial position. Management has not identiﬁed any need for impairment for any of the cash-generating units within the Group. For further information, see note 10, where it is described how management has performed the impairment test together with important judgements and estimates. Our audit procedures included, but were not limited to: • Review and assessment of SKF’s procedures and model for impairment tests of goodwill and evaluation of the reasonability of judgements and estimates made, that the procedures are con- sistently applied and that there is integrity in calculations; • Veriﬁcation of input data in calculations including information from business plans for the forecast period; • Test of head room for each cash-generating unit by performing sensitivity analyses; and • Review of the completeness in relevant disclosures to the ﬁnancial reports. When performing the audit procedures our valuation experts have been involved. Other information than the annual accounts and consolidated accounts The other information includes the pages 1–13 and 106–159 in this document which does not include the annual accounts, the consolidated accounts or our Auditors report. Our opinion on the annual accounts and consolidated accounts does not cover this other information and we do not express any form of assurance conclusion regarding this other information. In connection with our audit of the annual accounts and consoli- dated accounts, our responsibility is to read the information identi- ﬁed above and consider whether the information is materially 107 SKF Annual Report 2021 Report on other legal and regulatory requirements Opinions In addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Directors and the Managing Director of AB SKF (publ) for the ﬁnan- cial year 2021-01-01–2021-12-31 and the proposed appropria- tions of the company’s proﬁt or loss. We recommend to the general meeting of shareholders that the proﬁt to be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Managing Director be discharged from liability for the ﬁnancial year. Basis for Opinions We conducted the audit in accordance with generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulﬁlled our ethical responsibilities in accord- ance with these requirements. We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our opinions. Responsibilities of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsible for the proposal for appropriations of the company’s proﬁt or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justiﬁable considering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’s equity, consolidation requirements, liquidity and position in gen- eral. The Board of Directors is responsible for the company’s organi- zation and the administration of the company’s affairs. This includes among other things continuous assessment of the com- pany’s and the group’s ﬁnancial situation and ensuring that the company’s organization is designed so that the accounting, man- agement of assets and the company’s ﬁnancial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing administration according to the Board of Directors’ guidelines and instructions and among other matters take measures that are necessary to fulﬁll the company’s account- ing in accordance with law and handle the management of assets in a reassuring manner. inconsistent with the annual accounts and consolidated accounts. In this procedure we also take into account our knowledge other- wise obtained in the audit and assess whether the information other- wise appears to be materially misstated. If we, based on the work performed concerning this information, conclude that there is a material misstatement of this other infor- mation, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Board of Directors and the ManagingDirector The Board of Directors and the Managing Director are responsible for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accordance with the Annual Accounts Act and, concerning the consolidated accounts, in accordance with IFRS as adopted by the EU. The Board of Direc- tors and the Managing Director are also responsible for such inter- nal control as they determine is necessary to enable the prepara- tion of annual accounts and consolidated accounts that are free from material misstatement, whether due to fraud or error. In preparing the annual accounts and consolidated accounts, TheBoard of Directors and the Managing Director are responsible for the assessment of the company’s and the group’s ability to con- tinue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of accounting is however not applied if the Board of Directors and the Managing Director intends to liquidate the company, to cease operations, or has no realistic alternative but to do so. The Audit Committee shall, without prejudice to the Board of Director’s responsibilities and tasks in general, among other things oversee the company’s ﬁnancial reporting process. Auditor’s responsibility Our objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing standards in Sweden will always detect a material mis- statement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggre- gate, they could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of these annual accounts and consolidated accounts. A further description of our responsibilities for the audit of the annual accounts and consolidated accounts is located at the Swed- ish Inspectorate of Auditors website: www.revisorsinspektionen.se/ revisornsansvar. This description forms part of the auditor´s report. 108 SKF Annual Report 2021 AUDITOR’S REPORT Auditor’s responsibility Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect: • has undertaken any action or been guilty of any omission which can give rise to liability to the company, or • in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. Our objective concerning the audit of the proposed appropriations of the company’s proﬁt or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the pro- posal is in accordance with the Companies Act. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s proﬁt or loss are not in accordance with the Companies Act. A further description of our responsibilities for the audit of the management’s administration is located at the Swedish Inspectorate of Auditors website: www.revisorsinspektionen.se/revisornsansvar. This description forms part of the auditor´s report. The auditor’s examination of the Esef report Opinions In addition to our audit of the annual accounts and consolidated accounts, we have also examined that the Board of Directors and the Managing Director have prepared the annual accounts and consolidated accounts in a format that enables uniform electronic reporting (the Esef report) pursuant to Chapter 16, Section 4 a of the Swedish Securities Market Act (2007:528) for AB SKF (publ) for the ﬁnancial year 2021. Our examination and our opinion relate only to the statutory requirements. In our opinion, the Esef report [#checksum] has been prepared in a format that, in all material respects, enables uniform electronic reporting. Basis for opinion We have performed the examination in accordance with FAR’s recommendation RevR 18 Examination of the Esef report. Our responsibility under this recommendation is described in more detail in the Auditor’s responsibility section. We are independent of AB SKF (publ) in accordance with professional ethics for account- ants in Sweden and have otherwise fulﬁlled our ethical responsibili- ties in accordance with these requirements. We believe that the evidence we have obtained is sufﬁcient and appropriate to provide a basis for our opinion. Responsibilities of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsible for the preparation of the Esef report in accordance with the Chap- ter 16, Section 4 a of the Swedish Securities Market Act (2007:528), and for such internal control that the Board of Direc- tors and the Managing Director determine is necessary to prepare the Esef report without material misstatements, whether due to fraud or error. Auditor’s responsibility Our responsibility is to obtain reasonable assurance whether the Esef report is in all material respects prepared in a format that meets the requirements of Chapter 16, Section 4(a) of the Swedish Securities Market Act (2007:528), based on the procedures performed. RevR 18 requires us to plan and execute procedures to achieve reasonable assurance that the Esef report is prepared in a format that meets these requirements. Reasonable assurance is a high level of assurance, but it is not a guarantee that an engagement carried out according to RevR 18 and generally accepted auditing standards in Sweden will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of the Esef report. The audit ﬁrm applies ISQC 1 Quality Control for Firms that Per- form Audits and Reviews of Financial Statements, and other Assur- ance and Related Services Engagements and accordingly maintains 109 SKF Annual Report 2021 a comprehensive system of quality control, including documented policies and procedures regarding compliance with professional ethical requirements, professional standards and legal and regula- tory requirements. The examination involves obtaining evidence, through various procedures, that the Esef report has been prepared in a format that enables uniform electronic reporting of the annual accounts and consolidated accounts. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of mate- rial misstatement in the report, whether due to fraud or error. In carrying out this risk assessment, and in order to design audit pro- cedures that are appropriate in the circumstances, the auditor con- siders those elements of internal control that are relevant to the preparation of the Esef report by the Board of Directors and the Managing Director, but not for the purpose of expressing an opin- ion on the effectiveness of those internal controls. The examination also includes an evaluation of the appropriateness and reasonable- ness of assumptions made by the Board of Directors and the Man- aging Director. The procedures mainly include a technical validation of the Esef report, i.e., if the ﬁle containing the Esef report meets the technical speciﬁcation set out in the Commission’s Delegated Regulation (EU) 2019/815 and a reconciliation of the Esef report with the audited annual accounts and consolidated accounts. Furthermore, the procedures also include an assessment of whether the Esef report has been marked with iXBRL which ena- bles a fair and complete machine-readable version of the consoli- dated statement of ﬁnancial performance, ﬁnancial position, changes in equity and cash ﬂow. Deloitte AB, was appointed auditor of AB SKF (publ) by the gen- eral meeting of the shareholders on 25 March 2021 and has been the company’s auditor since 25 March 2021. Gothenburg, March 2, 2022 Deloitte AB Hans Warén Authorized Public Accountant 110 SKF Annual Report 2021 Sustainability statements 1) General disclosures Organizational proﬁle .......................................... 111 Strategy ..................................................................... 112 Ethics .......................................................................... 113 Governance ............................................................. 113 Stakeholder engagement .................................... 114 Reporting practices .............................................. 115 SKF’s material topics Economic category Economic performance ....................................... 117 Anti-corruption ..................................................... 118 Anti-competitive behavior ................................. 118 Customer sustainability performance ........... 119 Environmental category Energy ........................................................................ 119 Emissions .................................................................. 119 Materials .................................................................. 123 Water .......................................................................... 123 Efﬂuents and waste ............................................. 123 Environmental compliance ................................ 123 Social category Employment ............................................................ 126 Labour management relations ........................ 127 Occupational health and safety ....................... 128 Training and education ....................................... 130 Diversity and equal opportunity ..................... 131 Human rights ......................................................... 133 Supplier assessments ......................................... 135 Socioeconomic compliance ............................... 136 EU Taxonomy ........................................................... 137 CONTENTS This report has been prepared in accordance with the GRI Standards “Core” option. The reader will ﬁnd relevant sustainability information in each part of the report. These statements provide SKF’s stake holders with information on the Group’s sustainability performance. Topics related to the Annual Report In addition to the information provided in this Annual Report, related topics can be found at skf.com/ar2021. • GRI content index 1) • CO 2 e emission data • Environmental performance data • Articles of Association • SKF Code of Conduct • SKF Environmental, Energy, Health and Safety (EHS)Policy • Manufacturing units 2021 • TCFD Report • Green Bond Investor Letter and Impact Report • SDG analysis About this report Statutory Sustainability Report SKF has prepared a separate report according to the Swedish Annual Account Act chapter 6, § 11 on sustain ability reporting and reports on the topics: • Business model pages 22–23 • Anti-corruption page 118 • Climate and environment pages 119–125 • Employees pages 126–132 • Human rights and other relevant social topics pages 133–136 • EU Taxonomy page 137 Risks associated with the topics above are found in connection to the topics in SKF’s overall risk management on pages 42–44 andon page 112. 1) Documents subject to limited assurance by SKF’s auditors. SUSTAINABILITY STATEMENTS 111 SKF Annual Report 2021 General disclosures Organizational proﬁle General Disclosures – GRI 102 2016 102–01 Name of the organization AB SKF 102-02 Activities, brands, products and services The SKF Group is a leading global supplier of products, solutions and services within bearings, seals, services and lubrication sys- tems. Services include technical support, maintenance services, condition monitoring, asset efﬁciency optimization, engineering consultancy and training. For information on SKF’s brands, please refer to skf.com/brands. 102-03 Location of headquarters Sven Wingquists Gata 2 in Gothenburg, Sweden. 102-04 Location of operations SKF operations are global. The Group has manufacturing opera- tions in 22 countries and direct sales channels in 70 countries. For more information please refer to SKF’s global presence on pages 32–41. 102-05 Ownership and legal form AB SKF, listed at Nasdaq Stockholm, Large cap. For more informa- tion about the SKF share, see pages 46–47. 102-06 Markets served SKF is a global actor, with business across all geographical markets and major customer industries. Pages 6–8 and 32–39 provide an overview of geographies and industries served. 102-07 Scale of the organization Represented in 130 countries, 42,602 employees, 15 technical centres and 87 manufacturing sites. Net sales in 2021 amounted toSEK 81,732 million. Total capitalization broken down in terms of debt and equity are presented in the ﬁnancial statements on page 53. In 2021, SKF delivered 429,825 tonnes of bearings, as well as seals, condition monitoring, lubrication systems and services. 102-08 Information on employees and other workers Employees and other workers by employment type Permanent Tempor ary Agency Total 2021 White collar Blue collar White collar Blue collar Western Europe 9,303 10,327 161 303 1,386 21,480 Asia and Paciﬁc 2,968 6,342 4 385 2,547 12,246 North America (incl. Mexico) 1,755 3,321 20 2 167 5,265 Eastern and Central Europe 847 2,598 29 782 164 4,420 Latin America 543 2,480 0 110 55 3,188 Africa and Middle East 277 44 1 0 6 328 Total 15,693 25,112 215 1,582 4,325 46,927 Data was collected from the Group’s ﬁnancial consolidation system per all operational units within the Group. The numbers represent headcount per year-end December 2021. Employees by contract and region 2021 Full time Part time Western Europe 19,226 868 Asia and Paciﬁc 9,696 3 North America (incl Mexico) 5,096 2 Eastern and Central Europe 4,243 12 Latin America 3,101 32 Africa and Middle East 320 2 Total 41,683 919 Employees by gender and contract 2021 Full time Share, % Part time Share, % Men 33,057 79% 316 34% Women 8,626 21% 603 66% Total 41,683 100% 919 100% Gender and contract data is extrapolated from different sources using percentage of full time and part time per gender from local People Experience systems and applying these percentages to the total headcount per geographic area. 102-09 Supply chain SKF’s downstream value chain serves some 40 different industries in 130 countries. To serve the diverse customer base in these markets in the best way, SKF owns and operates 87 manufacturing plants across the world. SKF directly employs over 26,000 people in manufacturing. Reﬂecting its global operations, SKF sources materials and services from suppliers around the world. The purchased material consists of steel raw material, such as bars, wires, tubes and strips, and steel-based components, such as rings, balls, rollers and sheet metal parts and other direct material, as well as subcontracted andtraded products. In addition to direct materials, SKF sources shop supplies, capital equipment and various types of services. Tosupport SKF’s global manufacturing footprint, SKF has sourcing ofﬁces around the world in Europe, China, India and in the Americas. About 90% of supplies to SKF factories comes from local or regional suppliers. The total annual spend of the SKF Group is around SEK45 billion and roughly around 1,100 suppliers make up80% ofthe total spend by volume. For more information please refer tothe Supplier assessments section on pages 135–136. SUSTAINABILITY STATEMENTS 112 SKF Annual Report 2021 102-10 Signiﬁcant changes to the organization and its supply chain In 2021, SKF acquired EFOLEX AB and Rubico Consulting AB. 102-11 Precautionary principle or approach As required by the International Chamber of Commerce Charter and referring to the RioDeclaration on Environment and Development, SKF applies aprecautionary approach in its development work. Conservative assumptions are also used for any claims made by SKF regarding product or operational performance. 102-12, 102-13 External initiatives and Membership of associations SKF endorses or subscribes to a number of internationally recog- nized principles, charters and guidelines which promote sustainable and ethical business practices. The main ones are: • The United Nations Global Compact, which is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti- corruption. SKF has participated in the Global Compact since 2006. SKF Annual Report is also the Group’s communication channel on progress for the principles of the Global Compact. • The International Labour Organization (ILO), which draws up and oversees international labour standards, bringing together representatives of governments, employers and workers to jointly shape policies and programmes promoting decent work for all. • The International Chamber of Commerce (ICC) is the voice of world business, championing the global economy as a force for economic growth, job creation and prosperity. • The Organization for Economic Co-operation and Development (OECD) has the mission to promote policies that will improve theeconomic and social wellbeing of people around the world. SKF endorses and works to apply the OECD Guidelines for Multi- national Companies. By doing this, SKF commits to conducting business in a global context in a responsible manner, consistent with applicable laws and internationally recognized standards. • Pursuant to SKF’s net zero scope 1 and 2 emissions by 2030 target, SKF joined the RE100 (Renewable Energy 100) initiative in 2020. This global initiative brings together some of the world’s most inﬂuential businesses committed to using 100% renewable electricity. • Pursuant to SKF’s overall climate strategy and ambitions, SKF committed to the Science Based Targets initiative (SBTi) in July of 2021. • Pursuant to SKF’s net zero scope 3 (upstream) by 2050 target, SKF joined the SteelZero initiative in2021. This global initiative brings together industrial users of steel committed to decarboni- zation of the global steel industry by 2050. • As part of SKF’s overall Responsible Sourcing strategy, SKF joined the Responsible Steel Initiative (RSI) in 2021. The RSI is the steel industry’s ﬁrst global multi-stakeholder standard and certiﬁcation initiative. • SKF is an active partner in several industry collaborations and initiatives. The Group holds dialogues with industrial peers on issues relating to technology and management across relevant short- and long-term aspects relating to economic, governance, environmental and social dimensions. SKF takes part in the World Bearing Association, Transparency International, Teknikföretagen, the Royal Swedish Academy of Engineering Sciences, the Swedish Life Cycle Centre and the Inter national Standardization Organization among others. In addition, SKF collaborates with a number of internationally recognized universities on topics such as tribology, materials techno logy, remote diagnostics, environmental and social sustainability andmetallurgy. • SKF maintains a central list of the organizations SKF is a member of. This list is reviewed annually to make sure that the organiza- tions are in line with SKF’s values and commitments. Strategy 102-14 Statement from senior decision-maker The President’s letter is found on pages 10–13. SKF’s strategic framework, trends, targets, achievements and outlook are described throughout the report. As described in the front section of this report, in February 2022, SKF has announced and embarked on a revised strategy and organi- zation. The work to adapt the current organization, processes and governance relating to sustainability matters in line with this new strategy is ongoing at the time of writing. The explanations provided in this section of the report on the governance, organization and processes related to sustainability reﬂect the reporting period 2021 and will be updated in subsequent reports. 102-15 Key impacts, risks and opportunities The United Nations Sustainable Development Goals (SDG) help to highlight risks and opportunities for businesses globally. The SDG’s provide a lens to the social change needed to achieve them. External drivers, trends and opportunities are described on page 22. SKF’s risk management is described on page 42. SKF’s materiality analysis, described on page 114, helps the organization identify sustainability risks in the value chain and supports the organization to ﬁlter out and aggregate the risks that are material. SKF’s integrated management system and processes for risk management are critical to integrate, monitor and manage the risks and opportunities that stem from internal and external forces – whether social, environmental, legal, political, technological and/or economic. For example, human rights related issues, where SKF has worked for many years according to external principles and charters to integrate human rights risks in its policies and procedures. 113 SKF Annual Report 2021 Ethics Governance 102-16 Values, principles, standards, and norms of behavior The SKF Code of Conduct is the main policy on ethical standards. There are several related policies, at Group level and in local adap- tions of the SKF management systems, but the SKF Code of Conduct is the superior policy. All other policies are subordinate to it. It is available in 19 languages and publicly available on skf.com/code. The SKF Ethics and Compliance Reporting Line is available to external parties on skf.com. SKF employees and others can report concerns in their own language via a designated web portal or by calling a local telephone number (telephone service is available only in Brazil and Mexico). SKF has a strict non-retaliation policy towards anyone raising concerns in good faith. During 2021, 431 (437) concerns were reported to the central functions via the SKF Ethics and Compliance Reporting Line or via other channels. The major types of concerns reported were discrimination or harassment (23%), conﬂict of interest (7%) and bribery (6%). Concerns related to COVID-19 amounted to 6%. In addition to the concerns reported to the central functions, grievances related to ethics and compliance are reported to – and managed by – local management. During 2021, a procedure has been developed for local grievances related to discrimination and harassment, to be reported centrally. 102-18 Governance structure as per 31 December 2021 The President of the Group, who is also the Chief Executive Ofﬁcer, is appointed by the Board and handles the day-to-day management of the company’s business in accordance with the guidelines and instructions from the Board. SKF is organized in Industrial Sales Americas, Industrial Sales Europe and Middle East and Africa, Industrial Sales Asia, Automotive, SKF Technology and Industrial Technologies. The responsibility for end-to-end procurement, manufacturing and logistics is combined into Bearing Operations. Group Management and the Board of Directors have the ultimate responsibility to state SKF’s mission and to ensure that the values and drivers are implemented. The Director of Group Sustainability reports directly to the Chief Executive Ofﬁcer and has the task to assure that all relevant aspects of sustainability are addressed and integrated into operations and activities throughout the Group. The Director of Group Sustainability also establishes policies, strategies and targets related to SKF’s overall sustainability performance. These in turn drive and support the integration of sustainability into business practices, processes, operations and staff functions. Sustainability performance is the responsibility of the operations and shall be delivered in accordance with the strategic direction and fundamental requirements as set by Group Management. The implementation of the sustainability program in the line organization is driven by the respective SKF areas, their business units or by country organizations, with direction and coordination from formal, cross-functional, decision making bodies and working- groups such as: • The Responsible Sourcing Committee, established to assure that SKF’s Code of Conduct for suppliers and sub-contractors is effectively deployed, and that appropriate measures are taken when deviations from the Code of Conduct are identiﬁed at our suppliers. • The Cluster level EHS and Energy reviews, and the operational EHS network, oversees issues related to management systems, ISO 9001, ISO 14001, ISO 45001, ISO 50001 and associated policies and instructions; and coordinates the deployment of the Group’s related strategy. • The Group Ethics and Compliance Committee, which oversees therisks and opportunities related to the ethics and compliance areas. • The Global Energy Committee drives and coordinates the pro- curement of energy, owns and drives the plan to transition to 100% renewable energy for the entire Group. • The Green Finance team which oversees the Green ﬁnance funds allocation process, reporting , approval and follow up of eligible projects. • The Group Health and Safety Committee brings together senior managers from EHS and People Experience with worker repre- sentatives from the World Union Council to ensure consultation and participation with the employee representees at Group level. In general, EHS and Sustainability topics are integrated into SKF processes and governance structures – for example, performance and strategy are regularly addressed by the Bearing Operations management team. Authority and responsibility are further dele- gated to the country managers who are appointed by SKF’s Group Management. Each country and company manager is responsible for their entity’s performance including ﬁnancial metrics, social impact, compliance and other topics as stated in the SKF Group Policy on Country Manager and Managing Director Roles and Responsibilities. The SKF Group values Empowerment • High ethics Openness • Teamwork 431 cases reported via the Group’s whistle blowing system 102-17 Mechanisms for advice and concerns about ethics SKF employees are requested to report behavior that is not in linewith SKF’s Code of Conduct to their manager, local People Experience function or to other senior managers. Employees canalso raise concerns or seek advice via the SKF Ethics and Compliance Reporting Line. The reporting line is hosted by a thirdpart andreports can be made anonymously, unless this is prohibited bylocal legislation. SUSTAINABILITY STATEMENTS 114 SKF Annual Report 2021 102-40–102-44 Stakeholder engagement SKF aims to align its business practices with the needs and expec- tations from its stakeholders. Stakeholder groups are deﬁned as entities or individuals that may both inﬂuence and be inﬂuenced by SKF’s activities. SKF works in different ways to identify individuals with whom to engage and establish ongoing dialogue. Connected tosustainable development, the general rationale is that all these different stakeholders have speciﬁc concerns. Feedback and input are therefore sought from a wide range of stakeholders and in many different ways. The input to SKF’s sustainability activities is collected from customers, investors and analysts, employees, unions and repre- sentatives from civil society, and is collected via interviews, surveys, conferences, meetings and data analysis. The work to engage with the stakeholder groups is conducted byrespective functions within the Group (e.g. Investor Relations, People Experience, Communication, Sales, Bearing Operations, Purchasing, Legal and Compliance). This includes managing the direct dialogue and identifying individuals from whom to seek feed- back. SKF has not made afull stakeholder analysis during 2021 but has sought and received input to complement the previous analysis and this has been reﬂected in minor changes to the materiality ratings of some topics. Stakeholder engagement Approach to stakeholder engagement Key topics and concerns raised Customers Customer input is sought and received via sales and marketing operations and activities carried out by the Group. These range from global discussions with key account managers to daily conversations between customer representatives and SKF’s local account managers. SKF also collects key issues and concerns from customer surveys and assessments. • Climate impact • Conﬂict minerals • Environmental compliance • Human rights and labour rights (including health and safety) • Corruption Investors and analysts SKF takes an active approach in communicating the Group’s strategy and performance to existing and potential investors, analysts and media. Information is provided through various channels, such as the quarterly reports, meetings with investors, telephone conferences, the company’s website and press releases. Capital market days are held to present the strategy, targets and the different businesses in more detail. SKF receives feedback from investors via discussions during investor meetings. • Climate impact and ﬁnancial climate risk and opportunities management • Human rights along the value chain (including health and safety) • Cost competitiveness and operational efﬁciency • Digitalization, job development and manufacturing footprint Employees and union organizations SKF holds an annual World Union Council meeting during which employee representa- tives meet with Group Management. This is a form of social dialogue to make sure that the framework based on the SKF Code of Conduct is deployed across the Group. Employee represen tatives are also members of SKF’s Board – see SKF’s Corporate Governance Report, pages 139–146. In addition, SKF carries out periodic employee feedback surveys to drive continuous improvement on working climate. • Environment, health and safety • Employment and competency development in relation to digital automation • Diversity and working climate • Leadership and change management Civil society The communities in which SKF operates are important stakeholders for the company and their input helps shape local SKF activities. Local SKF organizations interact with their surrounding communities through various activities and initiatives ranging from business related matters to volunteer work, charity work, sponsoring and local network collaboration. Local media is also considered to represent civil society. Formal and informal networks are used to share experiences and ideas with other companies, topic experts andNGOs. • Climate impact • General responsible business conduct, tax transparency • Connection between the Group’s strategy and the Global Goals Suppliers Suppliers’ input on material topics is managed via SKF’s responsible sourcing programme. Local sourcing ofﬁces enable close communication on daily operations. On-site audits and training provide feedback to SKF on suppliers’ performance related quality and sus- tainability as part of a total cost assess ment of supplier development. The SKF Code of Conduct is the standard used during audits and screening. • Employment procedures • Health and safety • Overtime • Systematic environmental management Collective bargaining agreements SKF holds collective bargaining agreements in most countries where it is present. The 20 countries that are part of the SKF World Union Council; Argentina, Austria, Brazil, Bulgaria, China, Czech Republic, France, Germany, India, Indonesia, Italy, Malaysia, Mexico, Poland, Spain, South Korea, Sweden, the U.K., Ukraine and USA – all have collective bargaining agreements. These countries make up over 95% of all blue-collar workers (around 25,000 of SKF’s total workforce of 42,000). If the workers at a site choose not to be unionized, or if there are restrictions to the independence of a trade union, the employees in the country are still covered by the SKF Framework Agreement and are part of a collective bargaining group. In addition to the 20 countries above, SKF employed around 1,000 people in blue-collar roles in sales, logistics and manufactur- ing, of which the biggest countries are: Colombia, Finland, Peru, Russia, Singapore, South Africa and Zambia. In 2021, annual European World Union Council (EWC) and World Union Council (WUC) meetings was held in October,due to the pandemic, in an online format with online translations. Due to the change in management, one extraordinary online meeting for both EWC and WUC was held in spring 2021. 115 SKF Annual Report 2021 Impact mainly on Material topic GRI standard Suppliers SKF Customers Society Economic topics Economic performance GRI 201 Economic performance 2016 Anti-corruption and Anti- competitive behavior GRI 205 Anti-corruption 2016 GRI 206 Anti-competitive behaviour 2016 Customer sustainability performance n.a Environmental topics Energy and emissions GRI 302 Energy 2016 GRI 305 Emissions 2016 Materials, water, efﬂuents, and waste, environmental compliance GRI 301 Material 2016 GRI 303 Water and efﬂuents 2016 GRI 306 Efﬂuents 2016, Waste 2020 Social topics Employment GRI 401 Employment 2016 Labour management relations GRI 402 Labour management relations 2016 Occupational health and safety GRI 403 Occupational health and safety 2018 Training and education GRI 404 Training and education 2016 Diversity and Equal opportunity GRI 405 Diversity and equal opportunity 2016 Human rights GRI 406 Non-discrimination 2016 GRI 407 Freedom of association and collective bargaining 2016 GRI 408 Child labour 2016 Supplier assessments GRI 414 Supplier social assessment 2016 GRI 308 Supplier environmental assessment 2016 Socioeconomic compliance GRI 419 Socioeconomic compliance 2016 102-45 Entities included in the consolidated ﬁnancial statements See pages 100–102. 102-46 Deﬁning report content and topic boundaries SKF seeks to provide stakeholders with relevant information regarding operational, ﬁnancial, environmental and social perfor- mance, based on the input provided to the Group as presented in the previous section. To do this, SKF applies reporting principles of stakeholder inclusiveness, sustainability context, materiality and completeness. The topic boundaries have been evaluated from an Reporting practices organizational and business context, as well as from a stakeholder perspective. It is also evaluated in terms of impact and contribution to the UN Sustainable Development Goals. When approaching stakeholders proactively, the respondents are usually provided a shortlist of potentially material topics. The stake holders are asked to highlight the most signiﬁcant topics for their assessments and decisions related to SKF. They are also asked to add additional issues or remove what they consider irrelevant. SKF uses this input, together with risk assessments, and general impact assessments to deﬁne the signiﬁcant environmental, eco- nomic and social impacts. SUSTAINABILITY STATEMENTS 116 SKF Annual Report 2021 102-47 List of material topics When combining the feedback above with previously collected input from other stakeholder groups, as presented on page 114, the result is translated and presented in terms of GRI Standard topics. All these topics are considered material and relevant to report. The context, scope and boundaries of each topic are described further in the speciﬁc disclosures on pages 117–136, along with themanagement approach. Loss of Biodiversity is an increasingly critical challenge for the planet. Due to the nature of SKF’s business, operations and value chain, the possibility to exert direct inﬂuence on this is relatively limited and therefore this is not included as a material topic. However, the work done on topics such as climate change alleviates some of the drivers of biodiversity loss. Certain SKF solutions and local community based actions also address biodiversity. 102-48 Restatements of information On pages 121 to 123, as deﬁned by the GHG reporting protocol, energy and CO 2 e statements relating to scope 1 and 2 emissions have been restated due to acquisitions and divestments. The reporting scope of transportation scope 3 emissions has been increased in 2021 and the previous data has been re-stated accordingly (page 123). 102-49 Changes in reporting During 2021 SKF has further explained the reported scope of scope 3 green house gas emissions related to purchased materials – speciﬁcally steel and forgings, see pages 122-123. Cajamar AM and Cajamar ICS have been consolidated under one site. St Cyr AM and St Cyr IM have been consolidated under one site. Walldorf Berlin replaces Hockeneim (closed) and includes Berlin. The following sites are Included for the ﬁrst time in 2021: • Jordanesia, Brazil • Dexter, USA • Moody, USA Updates to the materiality analysis Input received from stakeholders during 2021 has been added to complement previously collected feedback. The main new input sought pro-actively in 2021 comes from senior SKF managers, SKFcustomers, employees and unions. No signiﬁcant changes were identiﬁed in the updated analysis. There were no new or removed material topics. 102-50 Reporting period 1 January to 31December 2021. 102-51 Date of most recent report The previous report was published on 3 March 2021. 102-52 Reporting cycle Annual 102-53 Contact point for questions regarding the report Johan Lannering Director Sustainability email: [email protected] 102-54 Claims of reporting in accordance with the GRI Standards This report has been prepared in accordance with the GRI Standards: Core option. 102-55 GRI content index A complete GRI content index is available together with topics related to the Annual Report on skf.com/ar2021 102-56 External assurance To ensure SKF’s stakeholders and readers of the Group’s sustaina- bility report are conﬁdent in the transparency, credibility and materiality of the information published, SKF Group Management has decided to submit the sustainability report for third-party review and veriﬁcation. This has been done since the year 2000. Thesustainability report is subject for limited assurance by our auditors in accordance with the standard ISAE 3000. Please refer to the Auditor’s Limited Assurance Report on the Sustainability Report and statement regarding the Statutory Sustainability Report on page 138. The Board has also approved this report. 117 SKF Annual Report 2021 Material topic – GRI 201: Economic Performance 2016 Management approach – General disclosures 2016 103-1 Materiality and boundaries Economic performance is considered to be material for the SKF Group and its subsidiaries. The consolidated ﬁnancial statements include the Parent Company, AB SKF and those companies in which it directly or indirectly exercises control. 103-2–103-3 Management approach, its components and evaluation SKF is a proﬁt-driven organization. The ﬁnancial performance is the overall indicator of the economic impact SKF has on society. All SKF entities are accountable for their ﬁnancial and economic performance. SKF reports its ﬁnancial performance in accordance with IFRS. Please refer to page 62 for more information about SKF’s ﬁnancial accounting policies. 201-1 Direct economic value generated and distributed The data from the ﬁnancial statements has been used to break down economic value generated and distributed as described below. Economic value generated and distributed (MSEK) 2021 2020 Net sales 81,732 74,852 Revenue from ﬁnancial investments and other operating income 506 290 Economic value generated 82,238 75,142 Operating costs – 47,618 –46,074 Employee wages and beneﬁts –24,270 –23,000 Economic value distributed to providers of capital –3,496 –3,249 Economic value distributed to government (income taxes) –2,484 –1,826 Economic value distributed –77,868 –74,149 Economic value retained 4,370 993 Economic value generated includes net sales, interest income, and proﬁt on sale of assets and businesses, net. Operating costs include total operating expenses, plus the net ofother operating income and expenses, plus ﬁnancial net, less employee wages and beneﬁts, less revenues from ﬁnancial invest- ments and other operating income, less interest expenses. Employee wages and beneﬁts includes costs related to wages and salaries including social charges. Economic value distributed to providers of capital includes sug- gested dividends to SKF’s shareholders and interest expenses. Economic value distributed to government includes Group income taxes. For the actual payment of taxes during the year, see consoli- dated statement of cash ﬂow on page 58. 201-2 Financial implications and other risks and opportunities for the organization’s activities due to climate change SKF’s business is diversiﬁed in terms of products, customers, geographic markets and industries. The Group usually divides its customers into some 40 different industries. SKF owns and opera- tes around 87 manufacturing units in 22 countries around the world. This diversiﬁcation reduces SKF’s overall exposure to risks related to climate change. SKF reports to CDP and has aligned it's reporting approach with the TCFD framework. A detailed TCFD report is included in the Topics Related at SKF.com/ar2021. Business risks and opportunities SKF sees it as a key element in its strategy to provide products and offerings which are sustainable, low carbon and which can improve customers’ operations in these regards. SKF is also focusing on markets and industries that will beneﬁt and grow due to the actions needed to manage the climate crisis. One example is SKF’s early participation in the industrialization of wind and tidal energy. Another example is SKF’s close partnerships with automotive customers in electriﬁcation and to improve energy efﬁciency of drivelines. Many industries, especially those producing vehicles or input material to vehicles are subject to similar transformational changes. SKF is following this on an industry, as well as on a customer level, to develop new technologies for new demands. Please ﬁnd further details in the TCFD report which is included in the Topics Related at SKF.com/ar2021. Please see pages 6–7 for an overview of SKF’s business areas. SKF operations SKF has mapped all its manufacturing units from a physical cli- mate risk perspective (risks of ﬂooding and strong wind). Climate change effects are considered when deciding where to locate new manufacturing sites. One of the most immediate and obvious ﬁnancial risks related to climate change for SKF’s value chain is an increased cost of energy. It is with high uncertainty how and where, e.g. CO 2 taxation would beimplemented, and SKF chooses to address this as an integrated risk of energy cost. The best way to mitigate this risk is to reduce the energy demand. In terms of spend, electricity makes up most of the energy cost with a smaller share of natural gas, biomass, heat, fuel oil and LPG. To give an indication of the ﬁnancial impact, a 20% increase in costs related to energy would impact the Group's result by around MSEK 260. For more on SKF’s climate objectives, please refer to Climate impact and energy on page 119. Supply chain A general cost increase in energy would also impact the cost of raw materials and components purchased by SKF. Most direct materials undergo several reﬁnement steps before being procured by SKF. This makes SKF less sensitive to raw material cost ﬂuctuations, buthas traditionally made SKF more sensitive to other operational costs at suppliers. Regardless, energy cost remains one major cost driver in the supply chain. SKF has established an objective for energy intensive major suppliers to implement the ISO 50001 energy management standard to mitigate cost risks and to reduce environmental impact. Economic Performance SKF’s material topics SUSTAINABILITY STATEMENTS 118 SKF Annual Report 2021 Material topics – GRI 205: Anti-corruption 2016 and GRI 206: Anti-competitive Behavior Management approach – General Disclosures 2016 103-1 Materiality and boundaries SKF addresses anti-corruption and anti-trust as part of the Group’s compliance program. The compliance program includes the areas and supporting processes included in the illustration below. SKF compliance framework WHY Purpose HOW Structural pillars Policies and guidelines Management commitment and goverance Risk assessment Audit, investigation Internal control Training, awareness, recognition Reporting WHAT Compliance areas c o m p l i a n c e T h i r d p a r t y a n d e m p l o y m e n t H u m a n r i g h t s , l a b o r r e p o r t i n g F i n a n c i a l c o m p l i a n c e L e g a l / s t a t u t o r y p r i v a c y D a t a f r a u d , m o n e y l a u n d e r i n g ) A n t i - c o r r u p t i o n ( B r i b e r y , c o m p l i a n c e A n t i t r u s t e t h i c s W o r k t r a d e s a n c t i o n E x p o r t c o n t r o l , C o r r e c t D e t e c t P r e v e n t SKF has, over many years, had a strong focus on business ethics in its corporate values. This work has led to an increased number of reported concerns and a willingness to discuss ethical dilemmas more openly. Openness and transparency are key to a successful compliance program. SKF continues to work on fully incorporating these values in the corporate culture in all regions. 103-2–103-3 Management approach, its components andevaluation The function called Group Assurance is, together with Group Comp- liance, responsible for internal control, compliance, internal audit and enterprise risk management of the Group. SKF has Group policies and instructions setting out the expecta- tions on how to act. Processes, controls, guidelines, training and tools are integrated parts of the program and are available for employees on the Group’s internal websites. SKF’s anti-corruption efforts focus on regions and activities with a high corruption risk. The regional risk assessment is mainly based on the Transparency International Corruption Perception Index. SKF has dedicated compliance resources for all high-risk regions: Central and East Europe, China, India, Latin America, Middle East and Africa, Russia and CIS, and South-East Asia. Together with Group Compliance & Assurance, each region develops a compliance activity plan which is approved by the Audit Committee of AB SKF on a yearly basis. During 2021, SKF launched mandatory e-learnings in Data pri- vacy, Export Control and Conﬂicts of Interest with 88%, 85% and 78% completion rates respectively. (Conﬂict of Interest was laun- ched in December 2021). Also, a mandatory e-learning on Antitrust compliance was launched for employees in Sales Europe. The number of ethical concerns reported via SKF ethics & comp- liance reporting line reported 2021 was 431, this included 26 reports related to COVID-19. 205-1 Operations assessed for risks related to corruption All units are required to perform yearly compliance risk assess- ments. One of the main challenges, and thus one of the focus areas, is to create a commitment by local management to take ownership of compliance risk management, including development and imple- mentation of mitigating activities. The main corruption risk is when distributors and agents are used to represent SKF when interacting with governments or state-owned entities in regions with a high corruption risk. During 2021, compliance risk assessments have been conducted in Asia Paciﬁc, China, Eastern Europe, Latin America, MEA and Russia. At SKF’s manufacturing units, risk-based ethics and compliance reviews are carried out, in conjunction with environmental, health and safety audits. The purpose is to assist units in their work to identify and address speciﬁc ethics and compliance risks, including corruption. During 2021, eleven such reviews have been reported. 205-3 Conﬁrmed incidents of corruption and actions taken During 2021, SKF substantiated 15 incidents of corruption (incl. bribery, fraud, conﬂict of interest). As a consequence, four employees have left SKF. One distributor contract in India was terminated during 2021 due to involvement in corruption. There were no reported public legal cases involving corruption. 206-1 Legal actions for anti-competitive behavior, anti-trust and monopoly practices For any ongoing investigations, please refer to note 19 on page 82. Anti-corruption and Anti-competitive Behavior SKF has also incorporated risk management in the purchasing strategies. One risk area is supply issues linked to natural disasters. The risk mitigation actions will support suppliers to reduce the potential impact of climate change, such as extreme weather events. In general, the costs associated with actions to commercialize opportunities and to mitigate risks related to climate change are embedded in other costs, such as research and development, main- tenance and investment budgets, and cannot be reported separately. Direct impact on UN Sustainable Development Goals 119 SKF Annual Report 2021 Material topic, SKF indicator: Customer sustainability performance Management approach – General Disclosures 2016 103-1 Materiality and boundaries For many years, the Group has built up knowledge around lifecycle management and how environmental and social impacts can be reduced or avoided. Studies show that the greatest impact is during the use phase of SKF’s products in customer applications and sys- tems. SKF can enable improvements in customers’ sustainability performance through products, services, business models and value propositions. The improvements include for example in - creased energy efﬁciency, reduced CO 2 emissions, improved safety, reduced water use, increased lifetime of applications, in creased material efﬁciency, reduced noise levels and more. The Group also brings value to customers through the way we run ouroperations as a responsible business partner. Recent years’ development, with an increased understanding of the connection between economic, social and environmental issues and the implementation of the Sustainable Development Goals (SDGs) from the United Nations has provided the Group with the opportunity to collaborate more closely with customers to create Customer sustainability performance and deliver ever more sustainable solutions. In doing so, the Group has carefully assessed the targets and activities proposed by the Agenda 2030 and mapped risks and opportunities related to both internal activities and how SKF can further support customers withengineered solutions. 103-2–103-3 Management approach, its components andevaluation SKF has made cleantech one of its strategic focus areas and will continue to add technologies and offerings to the value proposi- tions. The Group enables and drives technology development in industries such as renewable energy generation and sustainable transport systems, including electric vehicles. Moreover, the Group develops new circular business models and works in collaboration with its customers to improve sustainability performance of their applications and systems. To support that work, SKF has estab- lished guidelines for product development, environmental pre- evaluation tools and guidelines for quantifying and communicating customer sustainability performance. As part of the Group’s climate objectives, SKF provides yearly aggregated revenue data from SKF customer solutions enabling climate change mitigation in these areas: renewable energy, electric vehicles, recycling industry and bearing remanufacturing. The total revenues of these areas amounted to SEK 6,8 billion in 2021. SEK billion 2021 2020 2019 Total revenues from renewable energy, electric vehicles, recycling industry and bearing remanufacturing 6.8 6.6 1) 5.2 1) Previously published ﬁgures for 2020 have been restated to reﬂect a change in classiﬁcation. Material topics – GRI 302: Energy 2016 and GRI 305: Emissions 2016 Management approach – General Disclosures 2016 103-1 Materiality and boundaries Climate change presents a critical challenge for businesses, govern- ments and society. The ability of SKF to run its operations and supply chain in a highly energy and carbon efﬁcient manner reduces the environmental impact of the Group and increases SKF’s compe- titive advantage. At the same time, the Group focus on developing and offering customer solutions that enable energy efﬁciency and greenhouse gas reductions is a key part of the overall strategy. The Group therefore focuses on improving energy efﬁciency and driving down GHG emissions from its own operations, its extended supply chain as well as helping to enable improvements for its customers. 103-2–103-3 Management approach, its components and evaluation In July 2021, SKF signed up to the Science Based Targets initiative (SBTi) and committed that all its climate targets shall be in line with the Paris Agreement to reach net zero global emissions by 2050 at the latest, to limit global warming to 1.5°C. The Group’s climate objectives are based on this commitment and a comprehensive understanding of SKF’s life cycle greenhouse gas emissions. The graph on the next page shows an estimation of all relevant GHG impacts from SKF in 2019 from raw material extraction to ﬁnished product at the customer. In line with this, during 2021 SKF announced its goal to achieve net zero greenhouse gas emissions (from raw material to ﬁnished product delivered to the customer) by 2050 – adding all relevant upstream scope 3 impacts to the existing scope 1, 2 and 3 impacts which SKF already reports and addresses. This goal includes and incorporates a number of sub-goals and interim targets such as the existing goals for 40% reduction in CO 2 emissions/tonnes sold pro- duct by 2025, the 40% reduction in CO 2 per tonne of goods shipped by 2025 and net zero SKF operations by 2030 (scope 1 and 2). It also introduces a number of new interim (2025, 2030, 2035 and 2040) goals which are summarized in the table below. As part of this updated approach and in order to engage with other stakeholders to drive change, SKF joined the SteelZero and ResponsibleSteel multi-stakeholder initiatives in 2021. Climate impact and energy Direct impact on UN Sustainable Development Goals Direct impact on UN Sustainable Development Goals SUSTAINABILITY STATEMENTS 120 SKF Annual Report 2021 Tonnes CO 2 e Waste to incineration and landﬁll Downstream transportation by SKF Employee commuting ICT Business travel Manufacturing equipment SKF operations scope 1 SKF operations scope 2 Indirect material Upstream transportation Indirect energy related emissions – upstream of generation Direct material 0 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 1,800,000 A deeper explanation of the overall approach can be found on SKF.com/decarbonizing. SKF is working to establish robust reporting approaches for those aspects of the new goals which we have not previously reported. The Group will increase the scope of reporting to include all these aspects over the coming two to three years, with highest priority on the most signiﬁcant impacts (direct material sourcing). Scope 2 emissions are calculated using the market-based method (GHG Protocol, 2015). In this statement, the management approach along the value chain and total energy and emissions are disclosed. Purchased direct material Logistics Other up-stream impacts SKF operations GHG Reporting Scope Scope 3 – upstream, expect logistics both upstream and downstream Scope 1 & 2 2025 • ISO 50001 for energy intensive suppliers. • 15% reduction in emissions from forging and ring suppliers, base year 2019. • 40% reduction in CO 2 emissions per tonne of goods shipped to end customer, base year 2015. • Ambition to limit GHG for business travel to <50% of 2019 ﬁgure. • Goals and follow up deﬁned for all other relevant emissions. • 40% reduction of CO 2 emissions from manu- facturing per tonne ofbearings sold, base year 2015. • 5% year on year improve- ment in energy efﬁciency. 2030 • 32% reduction in emissions from direct material, base year 2019. • SteelZero goals met or exceeded for steel suppliers. 35% reduction in transport related greenhouse gas emissions, base year 2019. TBD Net zero emissions for allSKF operations. 2035 43% reduction in emissions from direct material, base year 2019. 55% reduction in transport related greenhouse gas emissions, base year 2019. TBD 2040 60% reduction in emissions from direct material, base year 2019. 77% reduction in transport related greenhouse gas emissions, base year 2019. TBD 2050 Net zero emissions SKF’s own operations In 2020, SKF announced the objective for manufacturing and other operations to achieve net zero GHG emissions by 2030. This relates to scope 1 and 2 emissions and will be achieved by a combination ofefforts focused on energy and material efﬁciency, generating re newable energy, sourcing renewable energy and, as a last resort to cover any remaining emissions, purchasing carbon offsets. As part of this approach, SKF joined the RE100 initiative – a signal that the Group intends to source 100% renewable electricity by 2030. In 2021, SKF used some 1,772 GWh of energy in its manufac- turing operations, which has resulted in around 369,881 tonnes of CO 2 emissions. In addition to ISO 14001:2015 for environmental management, SKF has an energy management system globally certiﬁed according to ISO 50001:2018. The certiﬁcate covers the 45 more energy intensive operations making up about 80% of the Group’s total energy use. SKF has a centralized function to manage strategic energy sourcing decisions for the Group, including cost effective reduction of CO 2 intensity. SKF’s management approach is decentralized to SKF’s sites and integrated in the environmental management system. Energy efﬁciency work at sites is often closely linked to local maintenance strategies. To increase focus and accelerate improvements, in both energy and CO 2 performance, SKF applies a Group wide energy target to all units within the scope of the ISO 50001 standard. In 2021, SKF required an improvement in energy performance of 5% compared to unit, cluster, area or Group energy base line. The base line is esta- blished using linear regression of the previous two years’ monthly energy use vs. value added (a measure of production activity, which is known to correlate with energy demand). This KPI removes dis- tortions, which impact more simplistic measurements of energy performance (such as production volume variations) and allows afocus on the real underlying energy performance. In 2021, the performance against this target was –1.7% vs. the –5.0% target. Energy performance improved in 2021, although not enough to reach the target. This was mainly due to supply chain disruptions caused by the COVID-19 pandemic which had a negative impact onproduction and energy efﬁciency. Estimated GHG emissions (tonnes), base year 2019 121 SKF Annual Report 2021 Goods transportation SKF is directly managing most of the goods transportation down- stream and part of the transportation upstream. The Group works to reduce CO 2 emissions from transports in four main ways: optimi- zing transport networks and routing; using energy-efﬁcient modes of transport with low CO 2 intensity (e.g. ocean and rail instead of airwhere and when feasible); procuring transport with high fuel efﬁci ency and low-carbon fuels; and minimizing mileage between suppliers, factories and end customers (i.e. optimize SKF’s footprint). Raw material and components As seen in the graph above, the emissions from raw material and components (direct materials) are typically the most signiﬁcant of all ‘cradle to customer gate’ emissions. For several years, SKF has worked to inﬂuence energy intensive suppliers by requiring them to implement energy management sys- tems certiﬁed according to ISO 50001. This standardized way of managing energy and emissions is considered a pragmatic approach to cut emissions in the upstream value chain. During 2020 and 2021, SKF has increased its focus on driving reductions related to raw materials and components. The Group isworking with the 13 largest steel suppliers (representing 80% of total steel sourcing by weight) and the 15 largest suppliers of steel forgings (representing 45% of total forging supply). SKF has started to focus on this because steel and forgings are by far SKF's most energy and carbon intensive suppliers andsteel represents more than 95% of weight total direct material purchased by the company. The focus is applied in several ways. Firstly, the companies in scope are required to report the scope 1 and 2 emissions which result from the materials supplied to SKF. The aggregated report ofthis data is included in this report. Secondly, the suppliers are required to explain and present their plans to improve energy efﬁciency and CO 2 per tonne of output. SKF has developed a tool which allows product designers and purchasing colleagues to esti- mate the upstream CO 2 impact of different steel supplier options. This allows SKF to meet increasing customer focus on reducing the embedded CO 2 emissions in the products which they buy. During 2021, SKF started the process to inform and engage the direct material suppliers in the scope of the Groups new net zero 2050 objective and this work will continue through 2022. The scope 3 direct material ﬁgures presented in this report represent around 72,6% of the estimated total for this scope (steel, rings, rolling elements). In line with the Groups net zero 2050 stra- tegy, SKF will systematically increase the scope of reporting GHG emissions related to its signiﬁcant direct material suppliers in the next few years, with the aim to have at least 95% coverage by 2025. Business travel SKF monitors CO 2 emissions from the large majority of business tra- vel undertaken by its employees. Included in the scope are Argen- tina, Brazil, Canada, Chile, China, Europe, India, Mexico, Uruguay and USA. In August 2020, SKF announced the ambition toreduce CO 2 emissions from business travel by limiting the amount of CO 2 from business travel at 50% of the full year 2019. The ambition com- mits to stay below this ceiling each year for the coming several years and will be achieved by signiﬁcantly increasing the use of digital col- laboration in order to reduce the need for business travel. Other upstream impacts As described in the carbon footprint graph above and Position Paper referred to previously, there are several other upstream GHG impacts associated with SKF’s activities. These include upstream energy related emissions, information and communications techno- logy (ICT), employee commuting and indirect material purchasing. These impacts are much less signiﬁcant compared to those from SKF operations, direct material purchasing and logistics. In total, they make up around 15% of the total footprint, nevertheless, as part of the Group's net zero 2050 commitment, SKF will work to ﬁnd pragmatic ways to report and drive toward net zero also in these aspects. Customer solutions Life cycle studies conﬁrm that the greatest potential for SKF to reduce environmental impact, lies in the customer use phase of the Group’s products and solutions. As reported on page 119 (customer sustainability performance), many of SKF’s offerings can be strongly linked to sustainability needs alongside other business needs and in doing so, create value for customers, investors and society. Some are more speciﬁcally linked to mitigate climate change. Life cycle impact In addition to cutting climate impact in the transactional value chain, SKF also works to develop new business models to reduce environmental impact alongside cost. Firstly, the Group works to predict maintenance and enable cost effective repair and service within the customers’ processes. Secondly, SKF brings back bea- rings and units for refurbishment or remanufacturing – a process which can cut energy and emissions by up to 90%, compared to theproduction of a new bearing. Data reporting according to the Greenhouse Gas Protocol guidance In these statements, all SKF’s manufacturing sites, technical and engineering centres and logistics centres are included, including those outside the ISO 50001 scope. Joint ventures are included where SKF has management control. Energy data and related greenhouse gas (GHG) emissions are reported monthly and followed up biannually by the SKF Group Management. SKF uses the GHG Protocol Corporate Guidance for reporting itsemissions. Due to the nature of SKF’s operations, only three greenhouse gases are likely to be released in signiﬁcant quantities for tracking. These are CO 2 , methane and nitrous acid, where CO 2 is byfar the biggest contributor to SKF’s emissions. Scope 1 and 2 emissions are all reported in CO 2 - equivalents (CO 2 e), including the above mentioned other emissions. Refrigerants are currently not included in the GHG reporting scope as their impact on the overall carbon footprint is considered to be insigniﬁcant. 302-1 Energy consumption within the organization Source, GWh 2021 2020 2019 LPG 18 16 19 Natural gas 298 255 288 Fuel oil 8 5 6 Renewable energy generated onsite 1) 32 20 23 District heating and cooling 141 118 112 Electricity 1,275 1,146 1,248 Total energy use 1,772 1,561 1,696 1) includes electricity procured with Power Purchase Agreement (PPA) 302-3 Energy intensity This disclosure includes all energy generating scope 1 and 2 emis- sions for the SKF Group, and revenues in SEK million for the SKF Group. In this disclosure, the data have not been adjusted for acquisitions and divestments. GWh per SEK million 2021 2020 2019 Total energy use within the organization (GWh) 1,772 1,561 1,696 Revenues, net sales (MSEK) 81,732 74,852 86,013 Energy intensity (GWh/SEK million x 1,000) 21.68 20.85 19.72 SUSTAINABILITY STATEMENTS 122 SKF Annual Report 2021 302-4 Reduction of energy consumption As mentioned, SKF uses a speciﬁc target and KPI to drive improved energy performance at the main manufacturing sites. 2021 sho- wed a -1.7% improvement against this target indicating an underly- ing energy efﬁciency saving of 15.5 GWh. 305-1 Direct (scope 1) GHG emissions and 305-2 Energy indirect (scope 2) GHG emissions During 2021, SKF purchased a small quantity of carbon offsets to cover the last few tonnes of scope 1 emissions (for building heat) to make SKF’s factory in Tudela, Spain, net zero. During 2021, SKF switched from gas ﬁred heating to renewable electric power heat pump at this facility, thereby eliminating the need for continued off- set purchases. In general, SKF considers carbon offsets to be a last resort in achieving its targets – only to be deployed when all other measures to avoid emissions (energy and material efﬁciency, fuel switching, renewable energy sourcing or generation) have been exhausted. Historical data in this disclosure has been adjusted for acquisi- tions and divestments in line with the GHG Protocol. Market-based emissions, tonnes 2021 2020 2019 Direct (scope 1) GHG emissions CO 2 e emissions 56,478 50,285 58,606 Energy indirect (scope 2) GHG emissions CO 2 e emissions market-based 313,403 331,509 361,960 Total CO 2 e emissions, market-based 369,881 381,794 420,566 Location-based, tonnes 2021 2020 2019 Direct (scope 1) GHG emissions CO 2 e emissions 56,478 50,285 58,606 Energy indirect (scope 2) GHG emissions CO 2 e emissions, location-based 525,849 466,248 501,067 Total CO 2 e emissions, location-based 582,327 516,532 559,673 Sources of emissions Tonnes, conversion factors in tonne per unit in brackets 2021 2020 2019 Direct (scope 1) LPG (3.0 per tonne) 3,890 3,468 3,996 Fuel oil (3.2 per tonne) 1,937 1,302 1,565 Natural gas (0.002 per cubic meter) 50,651 45,515 53,045 Supplied (scope 2), market-based Electricity 288,589 310,282 341,931 District heating and cooling 24,813 21,226 20,030 Total CO 2 e emissions, market-based 369,881 381,794 420,566 Scope 1 emission factors have been derived from the UK DEFRA standard, except Gothenburg where the local RECERT standard has been applied. Scope 2 contractual emission factors have been provided by relevant electricity suppliers. Scope 2 location based emission factors have taken from IEA, DEFRA and other recognized data sources. DEFRA Standard used for district heat except certain sites in Germany, Sweden and Poland where speciﬁc emission factors from suppliers are provided by the local district heat provider. 171615 18 19 20 232221 24 25 26 27 28 29 30 Progress towards net zero Goal 0 100,000 200,000 500,000 600,000 400,000 300,000 700,000 Total Scope 1 & 2 CO 2 e Market based Actual Trajectory Year 305-3 Other indirect (scope 3) GHG emissions Under scope 3 emissions, SKF reports CO 2 e emissions from the most signiﬁcant direct material suppliers (steel and forgings), goods transportation and business travel. Direct material supplier emissions These data are based on aggregation of ﬁgures provided by the 13major suppliers of steel and the 15 major suppliers of forgings to SKF. This scope covers 33% by volume of total direct material spend and 80% by weight of steel purchased (an increased reporting scope compared to 2020 of 16% and 27% respectively. This is only the second year in which SKF reports this information and the data should be considered as indicative rather than a precise quantiﬁ- cation of these upstream impacts. Going forward, SKF is working toincrease both the scope and accuracy of the data collected and reported. CO 2 e Tonnes 2021 Scope 3 direct material supplier emissions in scope 1) 770,246 Scope 3 direct material supplier emissions total 2) 1,060,424 1) See text for description of scope. 2) Total estimated emissions related to steel, forging, rolling elements Goods transportation data and related CO 2 e emissions 2021 2020 1) 2019 1) 2015 1) CO 2 e emissions from transports scope 3, (tonnes) 226,666 144,466 173,459 153,031 Transport works (tonnes shipped) 422,720 340,934 392,224 352,641 1) Scope of reporting was increased and ﬁgure for 2020 recalculated, previous ﬁgures re-stated accordingly. Shipped volumes and emissions per transport mode 2021 Road Sea Air Rail Transport works, tonnes shipped, % of total 70.2 26.1 1.6 2.1 CO 2 e emissions, % of total 21.0 29.0 47.5 2.5 Tonne * kilometer, % of total 11.0 80.6 3.1 5.3 Business travel (air travel) 2021 2020 2019 CO 2 e emissions (tonnes) from air travel (scope 3) 3,990 3,584 12,954 123 SKF Annual Report 2021 305-4 GHG emissions intensity All greenhouse gases are included and converted to CO 2 e emissions according to the GHG Protocol for scope 1–3. SKF’s bearing manufacturing (scope 1 and 2) Intensity in tonnes unless otherwise stated 2021 2020 1) 2019 1) 2015 1) CO 2 e emissions – bear- ings & units factories 308,613 323,750 352,376 482,956 Weight bearings and units sold 2) 429,825 367,68 4 388,565 336,803 GHG emissions intensity CO 2 e emissions/tonnes sold products 0.72 0.88 0.91 1.43 Change vs 2015, % –50% –39 –37 — 1) All data has been restated to reﬂect acquisitions and divestments. Missing historical data for acquisitions are estimated. 2) ”Weight bearings and units sold” for 2015 restated in 2020 Goods transportation (scope 3) 2021 2020 1) 2019 1) 2015 1) GHG emissions intensity kg CO 2 e emissions per tonnes shipped goods to end customer 2) 536 424 442 434 Change vs 2015, % 24 –2 2 — 1) Scope of reporting was increased in 2020 and previous years restated accordingly. Restated 2015–2020. 305-5 Reduction of GHG emissions (scope 1 and 2) Following the good trend of recent years, absolute CO 2 emissions were again reduced in 2021. This is despite a sharp increase in production output vs. 2020 and is due to a combination of factors. Notably further increases in energy efﬁciency and an increased share of renewable energy. Goods transportation (scope 3) Continued problems related to COVID-19, material shortages and other disruptions made 2021 an extremely challenging year for theglobal logistics industry. This was reﬂected in a disappointing result for SKF’s goods transportation CO 2 performance. The KPI (CO 2 /Tonne KM) increased by 24% and this was largely due to the unavoidable use of air-freight to make up for inadequacy in the normal transport modes (mainly sea-freight). Going forward, SKF’s work to regionalise its manufacturing and supply chain footprint willresult in reduced need for intercontinental transports. Other scope 3 impacts During 2021, the number of direct material suppliers in scope has increased compared to 2020, from 10 to 28. SKF has focused on energy intensive suppliers, with the higher GHG emissions (steel, forgings). All investigated suppliers have been requested to share their GHG reduction target (CO 2 mainly). After the ﬁrst screening, the average target for steel makers is to reduce 20% by 2030 (vs.2019); for the others the planned reduction is 13%. SKF's new net zero 2050 strategy will be communicated to the suppliers to push for more aggressive targets and for further reductions. As the scope of reporting is still evolving signiﬁcantly, it is not yet possible to comment on the performance trend for most of other impacts such as ICT, employee commuting and indirect material purchasing. Material topics – GRI 301: Material 2016, GRI 303: Water and Efﬂuents 2018, GRI 306:Waste 2020 GRI 307: Environmental compliance 2016 Management approach – General Disclosures 2016 103-1 Materiality and boundaries Details can differ between the environmental topics but, overall, SKF has a similar management approach to Material, Water, Efﬂuents and waste, and Environmental compliance. These topics are material ﬁrst of all within SKF and its subsidiaries. In 2021, the Group sourced about 582,000 tonnes of metal components. The main impact from this lies within the value chain and is associated to energy and emissions. The main way in which SKF can inﬂuence this is by focusing on material efﬁciency in the manufacturing processes. By avoiding wasted material at SKF, the waste associated with the embedded energy and emissions upstream are also avoided. Although SKF operations are not considered to be water inten- sive, water is relevant in different ways depending on where in the value chain it is used. Direct water use is material at SKF sites loca- ted in areas of actual and potential water scarcity (see table below). In other locations the nature of SKF’s processes (most systems utilising water are closed loop) means that SKF typically does not represent a major water user in the local industrial context. Water is withdrawn from municipal supplies or other sources (ground and surface water) and is discharged in surface water or sewage sys- tems after treatment, with quality levels according to local regula- tions and in this way, water related impacts are addressed. Sites in water scarcity areas establish speciﬁc targets for reducing water consumption (see table below). Indirect water use is relevant due to its close correlation to energy generation. Downstream, SKF can provide solutions to reduce the water footprint for customers or help to make large scale water treatment viable and cost efﬁcient. Efﬂuents and waste are relevant from SKF’s manufacturing ope- rations. Compliance is followed up in relation to SKF’s manufactur- ing operations and those of its suppliers. Material, Water, Efﬂuents and waste, Environmental compliance Direct impact on UN Sustainable Development Goals SUSTAINABILITY STATEMENTS 124 SKF Annual Report 2021 Water efﬁciency performance for sites in water stressed areas Unit KPI 2021 vs. 2020, % SKF Shanghai Bearings Co, Deep groove ball bearings –23 Nankou –1 Dalian, Large size bearings 10 Dalian, Medium size bearings –42 Jakarta –22 Ahmedabad –15 Bangalore, Deep groove ball bearings –12 Haridwar –21 Mysore –17 Puebla, Hub units 24 Tudela –12 Shanghai, Automotive Technologies Co 20 KPI = water intensity – water use / production volume 103-2–103-3 Management approach, its components and evaluation (combined) SKF has deployed an environmental management system certiﬁed according to ISO 14001:2015. This is integrated with the health and safety management system and is based on the Group EHS Policy. The management system is further deﬁned at Group, country and site level. It includes all signiﬁcant manufacturing sites, technical and engineering centres and logistics centres. New or recently acquired subsidiaries are provided a time frame for inclusion. This is typically one to two years but can be extended if the com- pany acquired is of signiﬁcant size and or complexity. The overall coordination of the work is managed by a central staff function and the responsibility to drive improvements is with SKF’s functional areas in the line organization. SKF assures that environmental matters are prioritized through the line organization by integrating environmental performance delivery into the responsibilities of the factory manager, the cluster or Business Unit manager and up through to Business Area and Group. Local support, competence (particularly for legal compli- ance) and coordination for the units is provided by the EHS country co ordinators. Water quality, following local regulation, refers to the physical, chemical and biological characteristics. Potential spills, incidents and ﬁnes are publicly reported in the Environmental Data spreadsheet in Topics related to the Annual Report, please refer to skf.com/ar2021. Evaluation of the effectiveness of the management approach is done through internal and external audits and periodical reporting reviews governance being adjusted accordingly. SKF also has a grievance mechanism in place for incidents at suppliers. This is coordinated by SKF’s responsible sourcing com- mittee and reported in an aggregated overview of deviations from supplier audits. Environmental performance at suppliers is further reported on page 135. One important feature of SKF’s global environmental manage- ment system is to ensure that all operating SKF units are compliant with local rules and legislation, to ensure efﬁcient water use and responsible water management, including wastewater handling. The most important dimension of water for SKF is the water needed to generate energy for use over the value chain. Deﬁned Group level objectives • Eliminate solvents (emitting volatile organic compounds) from washing of bearings and bearing components by 2025. • Reach and maintain a recycling rate of grinding swarf at 80%. • Water use targets are established at SKF sites with signiﬁcant water risks. In 2021, SKF had eleven such sites. Group wide targets are not suitable in these cases due to the wide variation in the types and quantities of waste produced, as well as the local related infrastructure, therefore KPIs where local objecti- ves have been or are to be deﬁned cover the following aspects: • Waste recycling excluding direct material waste. • Waste recycling including direct material waste. • Wastewater treatment. Data collection All data is compiled either monthly, bi-annually or annually, using the Group’s main reporting and consolidation tool. It includes all signiﬁcant manufacturing sites, technical and engineering centres and logistics centres. Sales units are included when they are at the same site as manufacturing or logistics. Separate sales ofﬁces are excluded due to their minor environmental impact. Joint ventures are included where SKF has management control. Data from sites can be included in the compilation even if the site is not yet fully integrated in the management systems. Information is reported at a local operating unit level, aggregated to site, country/area, and Group level. Performance SKF has set realistic and ambitious targets to reduce environmental impact from its operations. Overall, the data presented indicates that SKF is reducing its environmental impact from its operations. 301-1 Materials used by weight or volume SKF uses various materials such as metals, rubber, solvents, hydraulic oil and grease. Steel is the main material used by SKF and much of the steel purchased by the Group is produced by re- melting steel scrap, as this provides favorable material properties and is widely available. SKF does not report any renewable materials or recycled input material. The most signiﬁcant part of the material used comes from components which have been machined and reﬁned along the value chain. This means that SKF does not have direct inﬂuence over the source of the material but only the speciﬁed quality. In general, bearing steel is made from a signiﬁcant proportion of scrap steel, however an exact percentage cannot be provided. Non-renewable material Tonnes 2021 2020 2019 Metal as raw material from external suppliers 582,062 460,971 470,305 Rubber as raw material from external suppliers 5,308 3,795 3,913 Oils 8,376 7,175 7, 813 Greases 2,524 2,153 2,138 Group target: eliminate solvents (volatile organic compounds) from washing of bearings and bearing components by 2025 SKF halved its use of solvents between 2007 and 2016. Thereafter, newly acquired businesses resulted in an increase. In 2018, SKF set a target to eliminate the use of solvents in washing processes for bearings and bearing components, which is the main way volatile organic compounds are emitted from the Group operations. 125 SKF Annual Report 2021 Group target – Eliminate solvent (volatile organic compounds) from all washing processes by 2025 Tonnes 2021 2020 2019 VOC (Organic solvents) total use 1,144 970 1,069 VOC (Organic solvents) emitted tothe atmosphere (washing of bearings and components in bearings manufacturing 1) 148 242 214 1) Past data are restated for acquired and divested units 303-1, Interactions with water as a shared resource and 303-2, Management of water discharge-related impacts Water is used at SKF sites for processes and civil purposes (toilets, showers, cooking facilities, etc.). Focus on efﬁcient water use is applied in various ways, for example, new factory building projects where latest technologies have been put in place also to achieve minimal impact on local resources. Practices like closed loop systems for industrial water used and rainwater harvesting are common in many SKF facilities. Water use is metered at site level for ”water from municipal supply” (the most common source) and ”water from other sources”. The ﬁrst is the aqueducts supply and the second includes supply by wells or other surface sources (e.g. rivers, creeks) practiced accor- ding to regional regulations. There are no cases of sourcing from the sea, or local water production. Numerous lifecycle assessments (LCAs) (according to ISO 14044:2006) have been conducted both on product and process levels, and water impacts have been identiﬁed. The main ﬁndings from these studies are that SKF’s direct water use is relatively insigniﬁcant compared to upstream use in energy generation, steel production, etc. However, SKF recognizes the increased importance of water efﬁciency and other measures at its sites located in areas of water scarcity. SKF uses the World Resources Institute’s (WRI) Water Stress Tool to identify those sites in areas of water stress or projected water stress. These sites are then required to deﬁne improvement plans and KPI’s to drive reduced water use through various means. Due to low water intensity of SKF direct operations and the mea- sures in place to follow applicable wastewater treatment require- ments, the chances of SKF water usage impacting local community water availability/quality are very low. As part of our overall environmental approach, SKF works with upstream users of water, such as steel and energy suppliers, to reduce water use. For example, by switching to renewable electri- city sources, a dramatic reduction in water needed per/KWh can be achieved compared to thermal power sources. The SKF require- ments for suppliers to adopt the ISO 14001 and 50001 standards will also help increase focus on water in the direct material suppli- ers (e.g. steel). 303-3 Water withdrawal by source As the clear majority of SKF’s factories are located in industrial zones, water is supplied by municipalities. Other sources have not been considered material. Therefore, SKF monitors total water consumption at operating units and not per withdrawal by source. As the reporting is based on actual measurements from water suppliers or at SKF sites, no speciﬁc assumptions are referred to. Water usage targets are established at SKF sites with signiﬁcant water risks. In 2021, SKF had eleven such sites. Water (1,000 N cubic meters) 2021 2)3) 2020 2)3) 2019 2) Water from municipal supply 1,902 2,062 1,796 Water use from other source 1) 1,117 1,075 921 Water withdrawal total 3,020 3,137 2,717 1) “Other source” is mostly wells from which water is extracted. 2) All data has been restated to reﬂect acquisitions and divestments. 3) In 2020, additional 461,000 cubic meters due to an undetected leakage at Falconer US site. 303-4 Water discharge Water discharge follows regional regulations. The ﬂow is going to local sewage systems or to surface water ﬂow in compliance to mentioned regulations for the quality of discharged water (suspen- sion, temperature, etc.). Metered discharge ﬂows are thus not reported. 306-2, 306-3, 306-4, 306-5 Waste by type and disposal method SKF works to avoid waste generation in a number of ways. Upstream these include the use of near-net shape production tech- nologies such as cold rolling (minimizing the amount of material which needs to be removed in subsequent processes). Examples within SKF operations include avoidance of scrap and excessive material use through optimized processes and downstream SKF works with its remanufacturing approach to extend the life of SKF products and the systems in which they operate – thereby avoiding waste. Almost all recycling, reuse and recovery of waste which is diver- ted from disposal is undertaken by external companies (steel plants, waste management and recycling companies etc.). SKF is now starting to perform recycling (reconditioning) of lubrication oil at some sites using SKF’s RecondOil solution, but this is not yet reported separately. As part of the Group’s overall responsible sourcing approach, SKF requires that waste management companies and other companies making use of SKF’s residual materials operate in full compliance with the SKF code of conduct and therefore all applicable local legislation, The Group reports disposal methods by reuse, recycling, incine- ration with and without energy recovery andlandﬁll. Local objecti- ves have been required by the Group to be established and these shall drive sites upwards in the waste hierarchy with the goal to reach zero waste. The amounts of residual material and recycling rate are disclosed below, and in more detail in the Environmental data spreadsheet available at skf.com/ar2021. SKF reports all signiﬁcant residuals and waste site-by-site for all relevant SKF’s units. In this note, SKF highlights the most signiﬁcant residuals, recycling rates and the amount of waste sent to landﬁll. The data on weight of waste gene- rated comes from both SKF measurements and those made by the waste management companies – depending on the fraction and the location. SUSTAINABILITY STATEMENTS 126 SKF Annual Report 2021 Material topic – GRI 401: Employment 2016 Management approach – General Disclosures 2016 103-1 Materiality and boundaries As an employer, SKF needs to attract and develop a diverse and effective workforce to stay competitive and to deliver on the objec- tives set out by the Group. The focus is on the Group and its sub- sidiaries, where SKF works with central recruitment processes, training, leadership, people development and an excellent overall employee experience to proactively safeguard the need of future capabilities. 103-2–103-3 Management approach, its components and evaluation SKF’s People Experience has been centralized and is since 2020 represented in SKF’s Group Management by the Senior Vice President People Experience. Group People Experience's contribu- tion to SKF’s strategy is clariﬁed by focus areas and deliverables. The deliverables are to establish a customer centric culture, bor- derless collaboration in the full value chain, a great employee expe- rience, data driven decision making and a fearless leadership making change happen. The strategic initiatives are connected to the deliverables to ensure that the right steps are taken in the People Experience activities driven on Group, business area, region, country and site levels. Guiding the work is the Group People Expe- rience vision “People make it happen”. People Experience has a regular dialogue with the SKF World Union Council (WUC) and the European Work Council (EWC) accor- ding to the global framework agreement, which is based on the SKF Code of Conduct. Issues relating to signiﬁcant changes at SKF are always handled in close collaboration between company manage- ment, the WUC, the EWC and local unions. As SKF Group operates under Swedish legislation and the Swedish Corporate Governance Code, employee representatives are part of the Board. Among other things, this means that employee representatives from white and blue collar unions have direct insight on board level issues and the strategic outlook for the Group. People Experience has a strong local presence. However, digitali- zation and synergies in operations and business has increased the need for and enabled a more centralized and regionalized approach to processes, systems, operational model and organization. New common systems are being put in place to facilitate this work. The top risk in the workforce area is the ability to secure the right skills and expertise. To deliver on the SKF strategy, the company is reliant upon a workforce that is competent, engaged and ﬂexible in all its dimensions and geographies. In many markets there is a skill deﬁcit in the labor market. Examples of challenges are within engi- neering, digitalization and deep technical expertise in the core tech- nologies. There is a ﬁerce competition in the labor market, where the success of companies is dependent of the ability to attract, develop and retain critical competences and capabilities for the future. During 2021, the deﬁcit of critical capabilities has somewhat increased, as more companies are actively recruiting when the pandemic situation is slowly stabilizing. To mitigate the risks SKF continues to strengthen and develop the recruitment practices and our position of being an attractive employer. To clearly demonstrate the importance of putting the employees in the center of everything we do, the Human Resource department has transferred to become “People Experience”, in which customer centricity and employee experience steers the agenda. An important part is to further engage the workforce in making SKF a great place to work, the quarterly employee satis- faction survey (SKF Team Pulse) is now launched globally, and hasbeen complimented with an AI based platform in which all employees have been invited into dialogue with the SKF CEO. Tostrengthen leadership at SKF a new model has been introduced, inwhich focus is on leading yourself, leading others and leading the business. The model will be a good base to further develop leader- ship in SKF. End of 2021 SKF launched a new system and way of working with performance development, having continuous align- ment and feedback between managers and employees improved. Inthe pipeline for 2022 examples of projects progressing are to modernize the learning landscape within SKF and review our total reward and recognition design. Employment Non-hazardous waste (tonnes unless otherwise stated) 2021 2020 2019 Total residuals generated 142,050 125,564 138,349 Recycled or reused 117,005 102,450 114,571 Recycling rate, % 82 82 83 Incinerated with energy recovery 8,691 8,825 10,079 Incinerated without energy recovery 1,364 1,930 1,647 Landﬁll, excl. grinding swarf 14,990 12,356 12,051 1) 2018 was the ﬁrst year of reporting according to these fractions Group target: 80% recycling of grinding swarf On hazardous waste, SKF reports only grinding swarf, which is a mix of small metal particles and abrasives mixed with emulsion. The target is to reach and maintain 80% recycling, which was achie- ved the ﬁrst time 2015. SKF continues to depend greatly on varia- tions in regional legislation, volatile scrap prices and other aspects which mean that this continues to be a very challenging target. SKF is constantly working to ﬁnd business partners who can use grinding swarf as input to their production, both as direct and in- direct material. In 2021, the rate of recycled or reused grinding swarf decreased to 61%. This result was impacted by problems in the recycling supply chain in some regions. Hazardous waste, grinding swarf (tonnes unless otherwise stated) 2021 2020 2019 Grinding swarf generated 24,063 19,614 22,054 Recycled or reused 14,623 12,420 14,281 Recycling rate, % 61 63 65 Incinerated, heat recovery 1) 1,581 1,491 1,637 Incinerated, no recovery 1) 4,040 3,366 2,972 Landﬁll 1) 3,819 2,238 3,163 1) 2018 was the ﬁrst year of reporting according to these fractions 307-1 Non-compliance with environmental laws and regulations SKF received no signiﬁcant ﬁnes or directives from the environ- mental authorities in 2021. 127 SKF Annual Report 2021 401-1 New employee hires and employee turnover Employee retention rate by region (excluding lay offs) 2021 % Women Men Total 2020 2019 Asia and Paciﬁc 84.8 90.4 89.2 91.0 88 Middle East and Africa 87. 1 92.3 90.9 93.8 96 North America 88.3 87.9 88.0 92.5 90 Latin America 83.3 88.0 87.5 89.5 93 Eastern and Central Europe 86.1 90.1 88.6 90.6 91 Western Europe 96.8 97.7 97.5 97.2 97 The Group 90.2 93.4 92.7 94.0 93 Retention rate as reported above is measured by comparing remaining SKF employees at year end (minus newly employed) to the number at the start of the year. Lay-offs are excluded in the calculation. Employee turnover by region 2021 % Women Men Total 2020 2019 Asia and Paciﬁc 17.6 12.4 13.5 14.5 15 Middle East and Africa 14.7 10.4 12.0 24.6 13 North America 17.3 16.4 16.5 17.0 17 Latin America 22.6 18.4 18.9 19.8 18 Eastern and Central Europe 14.9 11.2 16.4 13.5 10 Western Europe 6.6 4.8 5.1 4.5 4 The Group 13.0 9.7 10.3 10.6 10 New hires by region 2021 Women as share of total, %Total number Women Men Total Asia and Paciﬁc 553 1,599 2,152 26% Middle East and Africa 14 35 49 29% North America 412 832 1,244 33% Latin America 128 652 780 16% Eastern and Central Europe 412 602 1,014 41% Western Europe 280 872 1152 24% The Group 1,799 4,592 6,391 28% Material topic – GRI 402: Labour management relations 2016 Management approach – General Disclosures 2016 103-1 Materiality and boundaries The main priority of the relationship between labour and manage- ment is to ensure that the Global Framework Agreement between SKF and the unions works in practice. This is based on the SKF Code of Conduct and the work focuses on labour management relations between SKF Group and workers within SKF Group and its subsidiaries. SKF also collaborates with other companies in formal and informal networks. 103-2–103-3 Management approach, its components andevaluation Issues relating to signiﬁcant changes at SKF, such as acquiring, divesting or consolidating operations, are always discussed and resolved openly and constructively with union leaders locally and with the leadership of the SKF World Union Council (WUC). The pre- cise approach must be adapted to the speciﬁc conditions of each occasion. The European Work Council (EWC) directive is the base for European related issues. SKF makes it clear in its Code of Conduct that all employees have the right to join a union and to bargain collectively. Continual dialogue is on-going to ensure that it works for both SKF and the union members. The WUC, which today includes 20 countries (see page 114) meets every year to openly discuss labor issues and to share what is on the Groups’ agenda. In addition to the SKF WUC meeting, an EWC meeting involving only European delegates is set up in conjunc- tion to the WUC. All countries fulﬁlling the EWC/WUC agreement requirements and with major operations, have the right to send appointed union ofﬁcials or observers to the SKF EWC/WUC meeting. In 2021, the annual EWC and WUC meeting was held in October, in an online format with online translations, due to travel restrictions during the COVID-19 pandemic. Due to the change in management, one extra meeting for both EWC and WUC was held online in spring 2021. The focus areas were employment, environment, health & safety and digitalization. Overall, SKF’s setup with the WUC is seen as a great competitive advantage for addressing and deploying global initiatives between Group management and unions. Labour management relations Direct impact on UN Sustainable Development Goals SUSTAINABILITY STATEMENTS 128 SKF Annual Report 2021 Direct impact on UN Sustainable Development Goals Material topic – GRI 403: Occupational health and safety 2018 Management approach – General Disclosures 2016 103-1 Materiality and boundaries Health and safety are a material issue in different aspects of SKF’s direct operations, as well as activities occurring along the value chain. In blue-collar work roles the focus is primarily on physical health and safety. This is also relevant for suppliers and is addres- sed as part of SKF’s responsible sourcing approach, see page 135. In addition, psychological health and wellbeing are increasingly material across all job roles within the company. 103-2–103-3 Management approach, its components and evaluation SKF’s accident rate has steadily improved over the last two decades and, while the imporovement rate has slowed down in recent years, 2021 showed an improvement of 11% in the recordable accident rate vs. 2020. In 2021, the accident rate was 0.67 per 200,000 worked hours. SKF strives to achieve further reductions in the accident rate by increasing the effectiveness of its management approach towards health and safety in various ways. The overall EHS governance in SKF emphasizes line ownership for health and safety. EHS managers are appointed in the manufact- uring clusters, business units and their equivalent management teams across SKF. Working as part of the operational management teams, these individuals make sure that appropriate attention, resources and investments are given to health and safety in their respective units. They are supported in this work by the long esta- blished EHS country coordinators who provide local expertise, guidance and support to the units. During 2021, SKF has focused on developing and promoting a Behavior Based Safety (BBS) approach. BBS works on the psycho- logical aspects of safety behavior – helping to promote a proactive and self driven approach to improving safety in the workplace. BBS has already been deployed in a number of SKF units and this has correlated with a substantial improvement in safety performance. Protecting Health and Safety during the COVID-19 pandemic During the COVID-19 pandemic, the SKF Group has worked accor- ding to the following priorities; • Protecting the health and safety of employees and their families. • Following all applicable guidance and requirements from relevant authorities. • Protecting SKF customers by keeping workplaces safe and main- taining production. Due to the highly dynamic and regionalized nature of the pandemic, the deﬁnition and execution of risk assessments and control measures has been largely devolved to the locally established crisis response teams which have been set up at country and site level. SKF Group has maintained an overview of the status at all units and supported local crisis teams via the Global EHS network. SKFGroup EHS and Group People Experience have held bi-weekly meetings with the World Union Council in order to discuss and add- ress any concerns of feedback raised via the local Union delegates from around the SKF Group. 403-1 Occupational health and safety management system SKF has established and deployed a Group-wide health and safety management system according to the ISO 45001:2018 manage- ment standard. High-level requirements on health and safety are deﬁned in the Group’s EHS policy and detailed instructions and procedures are integrated within the environment, energy, health and safety management system at Group, country and site level. The system drives compliance with legal requirements and those deﬁned by the Group, its customers and other stakeholders. The system also provides a framework to drive continuous improvement in health and safety performance. SKF successfully completed theprocess updating the management system to the new ISO 45001:2018 standard in 2021, replacing OSHAS 18001 manage- ment standard which the Group had previously applied. The scope of the management system includes physical and psychological health and safety. It covers employees at SKF sites, incommute or working for SKF off-site, such as maintenance engineers at a customer to SKF. Please refer to disclosure 403-8 for more information on the management system and it's coverage. 403-2 Hazard identiﬁcation, risk assessment and incident investigation SKF and its subsidiaries apply tools and processes as prescribed in the management system and according to legal requirements to prevent accidents and ill-health. Risk assessments are carried out on a regular basis at all levels from shop ﬂoor to ofﬁce. The quality of risk assessments is assured by training EHS staff and other per- sons undertaking them. Risk assessments are a focus during inter- nal and external audits, where typically a sample of risk assess- ments and corrective and preventative actions are reviewed. Measures to mitigate or eliminate the identiﬁed risks are deﬁned and implemented and risk assessments are reviewed and updated periodically or after any incident has occurred. Recordable accidents are reported and followed up both at the unit level and further up in the organization right up to Group level. Thorough investigations, which result in effective corrective and preventative actions must be deployed after each recordable acci- dent. In cases where the issue is linked to risks which may be rele- vant for other units, the causes of the accident and the corrective and preventative measures to avoid a repeat are shared with other relevant units. In certain cases, changes may be needed in the Group level management system as part of a preventative measure. All employees are required to report accidents, incidents and unsafe conditions, as they are a vital source of improvements and indicate opportunities to better control the associated risk. The SKF Code of Conduct and related processes make it clear that any Occupational health and safety 402-1 Minimum notice periods regarding operational changes SKF does not state a speciﬁc minimum notice period as the Group cannot overrule the centrally agreed collective bargain agreements in the countries SKF operates in. SKF holds consultations and pro- vides information to relevant parties, which are two separate proce- dures. Notice regarding operational changes is always deﬁned on a case-by-case basis but always with the local unions involved, and/or reviewed at the World Union Council. SKF units located in EU member states also adhere to the EWC directive 2009/38/EG. 129 SKF Annual Report 2021 management reprisals against individuals making such reports are strictly forbidden. In the unlikely event that a manager acts against the Code of Conduct, the SKF Ethics and Compliance Reporting Line can be used to escalate this. Risks reported must be addressed at the local level but are not required to be reported in detail further up in the organization. Only the total number of such cases should be reported for the unit as this gives an indication of the level of safety related activity. No distinction is made between SKF employ- ees, agency workers or other persons on site for the identiﬁcation and control of risk. SKF employs health and safety coordinators with expertise to support team leaders and managers at all levels in the organization. Periodic training is also organized on health and safety procedures, roles and responsibilities for factory managers and health and safety coordinators, as part of the SKF Improvement Academy and the SKF Manufacturing Academy. Based on the risk assessment carried out for a speciﬁc machine, process or role, employees receive training so that they understand the risks and how to manage them by following deﬁned procedures or wearing personal protective equipment for example. Any emp- loyees who intentionally ignore the deﬁned safety rules will face disciplinary measures to protect themselves and their colleagues from unsafe behaviors. When deﬁning corrective or preventative actions in response to identiﬁed risk, SKF’s management system requires that the hierar- chy of control measures principles be applied. First option is hazard elimination. If this is not possible, substitution, engineering controls, administrative controls and, ﬁnally, personal protective equipment. SKF’s Group policies on environment, energy, health and safety and quality are distributed and are highly visible on the walls of every factory and ofﬁce within the SKF Group. 403-3 Occupational health services Occupational health services are provided to workers at most units and vary from one country to another (depending on the need of the unit, the level of health service provided externally, etc.). SKF can- not report exactly how the quality of such health services are evalu- ated and ensured. Services are generally supplied by third parties who ensure data privacy in accordance with applicable regulations. 403-4 Worker participation, consultation and communication on occupational health and safety Worker representatives are appointed to the health and safety committees by the employees using a voting system in line with SKF World Union Council (WUC) processes. SKF health and safety committees operate on factory or unit management level with the objective to bring together worker and management representati- ves to discuss and agree on needed measures to improve the health and safety performance at the factory or unit. The committees meet at least once per quarter and decisions taken shall be commu- nicated to the workforce and acted and followed up on. The com- mittees are often involved in accident and incident investigations and may deﬁne additional corrective or preventative measures based on this. A Group level Health and Safety Committee is also established with representatives from the World Union Council, Group EHS and Group People Experience. Normally this committee meets once per quarter, however during the COVID-19 pandemic it has met on a bi-weekly basis to address speciﬁc related issues. During 2021, SKF’s WUC, Group EHS and Group People Expe- rience have continued to work to increase the effectiveness of the local committees through updated procedures, guidance materials and training and awareness. 403-5 Worker training on occupational health and safety All employees and agency workers are provided health and safety training, as well as other Code of Conduct trainings as part of induction training. More speciﬁc training is provided depending on the job description. Speciﬁc training for potentially hazardous jobs, such as working with electricity, at heights, hot work and so on ismandatory for employees working with these aspects. SKF alsoprovides general health and safety training via mandatory e- learnings. All trainings are provided during work hours. The efﬁ- ciency is assessed based on accident rates in combination with seve- rity rates, which are expected to be reduced towards zero over time. 403-6 Promotion of worker health The SKF Group has for a long time provided various health promo- ting activities beyond occupational safety. Close to 95% of the employees are covered by health promoting programmes, including HIV/AIDS prevention, substance abuse, obesity, healthy lifestyle, and stress management. Increasingly these programmes or initia- tives take a more holistic approach to health and, in 2018, SKF for- malized this process further by issuing the SKF Group Employee Well-Being policy. This is focused on three areas: psychological work safety, life-balance and healthy life choices. The conﬁdentiality of individuals is protected in line with general data privacy laws. During the COVID-19 pandemic, where possible, SKF has sup- ported employees to get vaccinated for example, by offering on-site vaccinations or giving paid leave to get vaccinated. 403-7 Prevention and mitigation of occupational health and safety impacts directly linked by business relationships As part of the SKF Code of Conduct for suppliers and sub- contractors, the Group performs on-site audits on a wide variety of sustainability topics. Health and safety are central elements of these follow- ups with suppliers. Read more about this on page 135, Supplier assess- ments. SKF’s employees also work at customers’ sites, at suppliers or other locations outside SKF premises. As part of the process of deﬁning such off-site activities, SKF assesses health and safety risks. Occasionally, risks not previously identiﬁed by the customer or supplier are found, and in such cases, control measures must be agreed before work commences. Occupational safety is also a central element in courses held by SKF for customers on mounting and dismounting bearings. 403-8 Workers covered by an occupational health and safety management system Over 78%, or some 33,000 employees are covered by the certiﬁed part of the health and safety management system. The system focuses on the manufacturing sites, workshops, logistics and technical centres. In addition, over 89% of consultants or agency workers under SKF’s management control (around 4,000 people) are also covered by health and safety management systems. No speciﬁc type of workers or staff are excluded. Newly acquired sites and companies are given a time period before being included in the scope of SKF certiﬁcation of management systems. All units are subject to internal audit every one to three years. The data has been collected from the SKF ﬁnancial reporting system using head- count data for sites and units included in the Group’s ISO 45001:2018 certiﬁcation. Accidents reporting is divided by the total headcount, including agency workers and consultants. SKF is glo- bally certiﬁed according to ISO 45001, ISO 14001, ISO 9001 and ISO 50001. SKF engages a qualiﬁed third-party audit company to audit for compliance to these management standards at Group and SUSTAINABILITY STATEMENTS 130 SKF Annual Report 2021 unit level. In addition to these external audits, a number of SKF employees are qualiﬁed as Group internal auditors and these indivi- duals also audit units to assure compliance with the standards, the environment, energy, health and safety policy and related Group instructions and requirements. Read more on the certiﬁcation on skf.com/45001. 403-9 Work-related injuries SKF does not separately report accidents on workers who are not employees but includes them in the total ﬁgures reported on the next page. Health and safety data are collected on a quarterly basis using the Group’s main reporting and consolidation tool. The accident rate is calculated with R × 200,000/h, where R = number of recordable accidents and h = total hours worked. 2021 2020 2019 2018 2017 2016 2015 2014 Accident rate for the Group 0.67 0.75 0.77 0.81 0.85 0.87 0.99 1.13 Rate of high consequence work related injuries 0.003 0.003 0.013 0.013 0.013 — — — 2021 2020 2019 Work related fatalities 0 0 0 High consequence work accidents 1 1 5 Recordable accidents 245 252 281 First aid incidents 1,863 1,987 2,539 Near miss incidents 3,582 4,016 7, 893 Unsafe conditions 30,171 20,988 14,498 Worked hours (x 200,000) 367 338 374 At some units, near miss and ﬁrst aid incidents occur and are addressed locally but are not reported at Group level. The ambition with the pyramid is that an increasing attention to near miss inci- dents and unsafe conditions, would result in better risk mitigation and a reduced number of recordable and serious accidents. Serious recordable accidents Recordable accidents First aid incidents Near miss Unsafe conditions 1 245 1,863 3,582 30,171 Unsafe conditions are since 2019 added at the base of the pyramid to increase a proactive reporting, i.e. the detection and study of events before they have a consequence for workers. Material topic – GRI 404: Training and Education 2016 Management approach – General Disclosures 2016 103-1 Materiality and boundaries SKF’s history of success has been dependent on the collective skills and experiences of the employees. With digitalization, globalization and new technologies come new opportunities to deliver sustainable offerings to customers, to enhance production processes and ways of working. This creates both challenges and possibilities for SKF employees to develop new skills that are of value to them as indivi- duals, to SKF and to the customers. To succeed in the fast-changing global competitive landscape, it is a necessity to develop employees. SKF is working to improve our offer towards all employees. On top of current traditional learning methods we are adding focus on 24/7 self-learning, bringing together content from external and internal sources, recommending material based on interest, needs and peer activity. The lifelong learning approach is contributing to the development of individuals, SKF and society. 103-2–103-3 Management approach, its components and evaluation Continuous learning and development is vital for SKF to stay com- petitive in the market. The employees’ own commitment and moti- vation for competence development are key elements to keep skills and experiences updated. Increasingly important is the informal learning taking place in the daily work through knowledge sharing and collaboration, using social platforms, open forums and commu- nities, self-studies and performance support tools. To ensure that competence development supports the strategic business challenges, academies are established within the business. Recent initiatives focus on virtual training deliveries in areas such as manufacturing, leadership, sales and application engineering. Local learning initiatives are also in place to meet the needs of speciﬁc units and locations. The Group People Experience function coordinates the overall strategy, methods and tools for enhanced learning in SKF. Using the centrally maintained learning and performance platform, employees can access e-learnings and formal programs, and their individual development plan (IDP). During 2021 leadership expecta- tions were clariﬁed and is now the base for employee growth. The three Leadership pillars are; Develop Yourself, Develop Others, Develop the Business. Development activities can include, e.g. job rotation, shadowing, mentoring, and speciﬁc technical training. Tosupport employee engagement, SKF Team Pulse has now been rolled out in SKF and includes all employees worldwide. Utilizing Training and Education Direct impact on UN Sustainable Development Goals 131 SKF Annual Report 2021 thejoint resources of Group People Experience, SKF Academies, learning experts, managers and employees, SKF has a solid foundation for effective competence enhancing activities. 404-2 Programmes for upgrading employee skills and transition assistance programmes SKF offers internal programmes and funding for external educa- tion. The exact approach differs from country to country. In several entities, employees can seek scholarships from employee develop- ment foundations. These are usually open for all employees and, at times, also to children of employees. Training and skill upgrading are also done at varying depths or degrees in different parts of the organization. In collaboration with the SKF WUC, the Group identiﬁed needs to re-skill people as part of meeting the demands of new digital technologies and new ways of doing business. Initiatives include re-skilling from production execution to maintenance by offering theoretical and practical education in electronics and mechanics, up-skilling in automation technology, robotics and simulations, as well as possibilities to combine work with part-time university studies in production development. These initiatives are continuing in the different SKF locations. During 2021 we have put further focus on upskilling our custo- mer facing functions within sustainability and especially how cus- tomers can lower emissions when using SKF products. This work will continue during 2022 in close collaboration with Sales and Technical Academy. SKF is also offering the possibility of transition assistance to the external market through coaching support for employees who ﬁnd new internal demands difﬁcult and would like to explore professions not available at SKF. 404-3 Percentage of employees receiving regular performance and career development reviews Managers at SKF are accountable to work with their teams to deﬁne individual and team goals to create clarity on how their achieve- ments contribute to the overall result and strategy. This process is supported by a global platform where managers and employees can agree, review and update progress and priorities throughout the year. An overall performance rating is deﬁned during the performance review meeting held annually. This is used as input to the salary review and talent management for white collar employees. The glo- bal platform for performance management (Cornerstone) covers about 14,000 white collar employee users in 2021. During 2021 the performance development process and system has been reviewed leading to the implementation of a new way of working and system in 2022. 2021 2020 Women Men Women Men Users with documented perfor- mance reviews in SKF’s global system, % 91 92 90 89 Material topic – GRI 405: Diversity and Equal Opportunity 2016 Management approach – General Disclosures 2016 103-1 Materiality and boundaries Equal opportunity and non-discrimination are central elements of the SKF Code of Conduct. It is crucial for SKF to offer equal prerequisites to compete for open positions. In the ever increasing competition for talent, SKF needs to be inclusive to all. The Code of Conduct was therefore the starting point stipulating the importance of encouraging diversity as a means to gaining competitive advantage. 103-2–103-3 Management approach, its components and evaluation According to the International Labour Organization (ILO), the global pay gap is estimated at over 20% and is one of the main challenges for freedom and equality for society. SKF’s overall approach is to start with equality and make sure that everyone in SKF has a fair chance to develop and compete for jobs. That competition should be based on professionalism. Diversity and Equal Opportunity To keep delivering in times of change, SKF is dependent on its people. SKF needs a truly inclusive atmosphere where differences bring people together, rather than separating them. To stay compe- titive and attractive, SKF has, during 2021, put continued effort into gender diversity. Succeeding to achieve gender balance means organizations don’t miss talents and abilities – robbing themselves of creativity and innovation. The Group works to integrate equality in people processes, such as learning, succession planning and recruitment. SKF Group’s recruitment principles are based on the SKF Code of Conduct and facilitate skills-based recruitment by utilizing Assesio’s Matrigma ability test, which is a scientiﬁcally robust instrument that has been reviewed and certiﬁed by Det Norske Veritas. In 2021, activities and programs were continued to keep focus on improving equality. The virtual global programme Elevate, tar- geting women with leadership ambition started in the beginning of 2020, continued during 2021. To further strengthen our ability to attract talents and safeguard that we attract from a diverse talent pool, an AI tool for inclusive language was introduced. Additional initiatives have focused on building awareness on Diversity and Inclusion, such as monthly diversity activities for the global applica- tion engineering team, establishment of a DEI council for North America, and workshops held globally for close to 700 leaders. Inaddition to global initiatives there are many local activities on going. Direct impact on UN Sustainable Development Goals SUSTAINABILITY STATEMENTS 132 SKF Annual Report 2021 405-2 Ratio of basic salary and remuneration of women to men Average annualized basic salary 1) , % 2021 Women’s average basic salary as percentage of men’s – Senior Management 85% Women’s average basic salary as percentage of men’s – Local Management 96% Women’s average basic salary as percentage of men’s – Other Staff 82% 1) Applies to staff basic salaries from all countries of the Group. Salaries for Group Management and Blue Collars are excluded. Total remuneration could not be reported at Group level. SKF Code of Conduct - Our working ethics commitment in relation to gender and pay requires that: All employees are treated equally, fairly and with respect regardless of race, gender, age, national origin or nationality, disability, caste, religion, sexual orientation, union membership or political afﬁliation we provide non-discriminatory working conditions and we promote diversity, we ensure that wages and other related beneﬁts meet at least the legal or industry minimum standard in the country in question. Wages and beneﬁts are rendered in full compliance with laws and collective agreements All employees at SKF are to be rewarded on the basis of their contribution to the companys success, i.e., salaries are to be indivi- dual, differentiated and based on the degree of difﬁculty of the position, together with the employee’s experience of the task and fulﬁlment of the job requirements. SKF uses a position evaluation system – IPE (International Position Evaluation) – for salary setting to ensure internal equity and to pay people fairly. Salary setting also follows legislation and/or union agreements as locally applica- ble. Equal pay audits are carried out locally adhering to country regulations. Differences in the gender pay ratio of the company are not due to unequal pay for equal work. A higher proportion of men in higher level positions, as well as a higher proportion of women in part-time work, are contributing to the total pay difference between women and men. SKF is striving for increased gender diversity on all levels and closing the gender pay gap. 405-1 Diversity of governance bodies and employees The graphs show the percentage of women and the age structure at different categories within the organization. Information on minori- ties is not available. The Board The Board refers to the SKF Board of Directors which makes up the highest governance body for the organization. Please refer to page 144. Board of Directors 2021 30%70% 2020 27%73% 2019 20%80% Age structure <30: 0% 30-50: 30% >50: 70% Women Men 30% 70% Group Management Group Management is the operational management team of the SKF Group. Please refer to page 148. Group Management 2021 20%80% 2020 20%80% 2019 20%80% Women Men Age structure <30: 0% 30-50: 30% >50: 70% 30% 70% Higher management Higher management refers to the around top 400 managers in the SKF Group. The actual num- ber in this population changes over time. Higher Management 2021 16%84% 2020 14%8 6% 2019 13%87% Women Men Age structure <30: 0.2% 30-50: 44% >50: 55% 55% 44% 0.2% Managers Managers refers to the employees who have direct reports. 1) Managers 2021 20%80% Women Men Age structure <30: 2.4% 30-50: 65% >50: 32% 32% 65% 2.4% Total employees Total employees refers to the total number of employees in SKF as per end of 2021. 1) Emplyees 2021 22%78% Women Men Age structure <30: 15% 30-50: 52% >50: 33% 33% 52% 15% 1) New deﬁnition and data source from 2021 and therefore no data is presented for previous years. 133 SKF Annual Report 2021 Material topics: Non-discrimination 2016, Freedom of associa- tion and collective bargaining 2016, Child labour 2016, Forced or compulsory labour 2016, Human rights assessments 2016 Management approach – General Disclosures 2016 This part of the report is prepared according to UN Guiding Principles on Business and Human Rights Reporting Framework as well as GRI Standards. 103-1 Materiality and boundaries SKF owns and operates around 87 manufacturing plants across the world, with around 26,000 employees in different types of produc- tion. These facilities have local and global supply of components and raw material. On risk to people, the salient issues for SKF relate to SKF employees and people working in the supply chain. The work is continually evolving as risk assessment and due diligence processes are developing and as more knowledge is gained about how the Group’s activities can have an impact on the people in proximity to SKF’s operations, its distribution, sales and end-use of products and services. Modern Slavery Act 2015 AB SKF is committed to ensure that the companies within the SKF Group do not allow slavery or human trafﬁcking. As with other human rights, this commitment extends to the supply chains used by the SKF Group. This statement is made pursuant to Section 54, Parts 1, 5 and 6 of the Modern Slavery Act 2015 and sets out the steps the SKF Group has taken to ensure that slavery and human trafﬁcking are not taking place in company operations or supply chains. 103-2–103-3 Management approach, its components and evaluation Background and policy commitment The SKF Code of Conduct is based on a number of international external principles and charters, such as ILO conventions, UN Gui- ding Principles for Human Rights, the International Chambers of Commerce Business Charter for Sustainable Development and theUN Global Compact. The SKF Code of Conduct has been used todevelop many related policies on speciﬁc topics and to address business partners along the value chain. The Code is available on skf.com/code and is part of commercial agreements with suppliers, sub-contractors, distributors and agents. The SKF Code of Conduct is the main policy for human rights, backed up by adapted versions speciﬁcally addressing suppliers, sub-contractors and distributors, but they are all based on the same principles. SKF works to integrate human rights aspects in all processes where SKF sees a risk that people could be adversely affected. This means that in screening and audit activities, such as internal ethics and compliance reviews and audits, quality audits, Code of Conduct audits at suppliers, etc., human rights are considered. Deviation or risks are resolved in the operations or escalated if needed. Alar- ming issues would be escalated to the audit committee at board level. SKF Group Management are continually updated on speciﬁc issues, such as health and safety for SKF’s employees and serious incidents. The Group’s EHS and responsible sourcing programmes are vital parts of managing salient human rights in SKF operations and supply chain. Salient human rights risks SKF perceives the salient human rights being related to freedom of association and collective bargaining, compensation, work hours, health, safety, wellbeing and discrimination. The salient risks are mainly associated to the supply chain. Lack of transparency and traceability means that the further upstream in the value chain, the more difﬁcult it is for SKF to identify concrete human rights risks. Other human rights issues that SKF is following closely, although not deemed salient, are related to children’s rights, child labour and young workers, and forced or bonded labour. SKF follows up closely, ﬁrst of all, with potential new suppliers on their risks related to these human rights. In this work, SKF focuses on geographic regions where risks are higher, where rule of law and social equality are weaker. SKF takes in third party data to assess the overall risks on human rights. Stakeholder collaboration SKF collaborates with a range of stakeholder groups to avoid or mitigate human rights risks. Customers typically require SKF to manage such risks. The primary stakeholder group with whom SKF has a direct relationship is the employees, and so a social dialogue isheld between local management and worker representatives. Inaddition to this ongoing dialogue on a local level, SKF Group Management meets annually with SKF World Union Council (WUC). SKF also maintains dialogues with peers and NGOs via networks such as the UN Global Compact, Transparency International and Roundtable on Sustainable Palm Oil (RSPO) as a supplier of bea- rings and solutions into that industry. Steel and steel components represent by far the most signiﬁcant material input to SKF in terms of value and weight. The steel supply chain is complex and highly globalized and may involve human rights risks particularly at the top end of the supply chain. Typically, SKF has no direct business relationship with actors beyond tier 1 or 2 and so driving change unilaterally is not feasible. Therefore, in 2021, SKF joined many other actors in the steel value chain as well as representatives from civil society in the Responsible Steel Initia- tive (RSI). The RSI is a multistakeholder initiative which works to identify and address salient human rights (along with environmen- tal) risks in the full steel value chain – from scrap or raw material toﬁnished steel. Trends and patterns 2021 At the annual conference, SKF WUC and the Group focused on health, safety, decent working conditions, COVID-19 control measures and behaviour based safety. Integrating ﬁndings and taking action The SKF Code of Conduct implies that the different stakeholder aspects shall be taken into consideration prior to any business decisions. Should any decision be taken that may have adverse impact on human rights, meaning against the SKF Code of Conduct, Human rights Direct impact on UN Sustainable Development Goals SUSTAINABILITY STATEMENTS 134 SKF Annual Report 2021 the individual who records such an event is expected to report this via formal grievance mechanisms so that the decision can be avoi- ded. For cases where the normal escalation routine is not an option, SKF uses an externally hosted ethics and compliance reporting mechanism, read more on page 113. The work to prevent adverse impact is a continuously ongoing task. The most obvious issues for SKF are related to freedom of association and collective bargaining as SKF has operations in countries where such do not exist. The Group works together with the WUC to seek pragmatic ways to bargain collectively and nomi- nate worker representatives. This is to be in line with its global framework agreement with the union, while at the same time making sure to adhere to local laws, and not put employees at risk. Impact from SKF’s business and products SKF works to continuously reduce any negative downstream impact relating to its business. SKF works to ensure compliance to laws and regulations, and to phase out material and substances hazardous to people and the natural environment. With regards to SKF’s business, the purpose of SKF’s products and solutions is to make things work better, run faster, longer, clea- ner and more safely. SKF considers that business can drive prospe- rity and growth to overcome social issues over time. The work related to human rights focuses on adhering to export control regulation and ensuring that SKF’s distributors adhere to the SKF Code of Conduct. SKF has identiﬁed a few industry hotspots where the general human risks are higher, such as the extractive industries, forestry and energy, as these are associated with signiﬁcant land use. No cases of systematic human rights violations linked to SKF business activities have been identiﬁed during 2021. 406-1 Incidents of discrimination and corrective actions taken During 2021, 99 reports related to discrimination and harass- ment have been received through the SKF Ethics & Compliance Reporting Line. These cases are normally assigned to local investigators (mainly People Experience country leads) and actions are taken on a local level. SKF has set a process in place during 2021 so that concerns about harassment and discrimination that are reported locally (e.g. via email or in-person to People Experience) are also reported and documented centrally. In addition, SKF works to establish a corporate harmonization, adhering local labor laws, in regards of setting appropriate actions as result of the ﬁndings of local investigations. 407-1 Operations and suppliers in which the freedom of association and collective bargaining may be at risk All employees are covered by collective agreement or the SKF Framework agreement. The overall approach from the state towards union membership and the level of independence of trade unions in certain countries where SKF has operations, creates challenges in this respect. SKF works pragmatically with the WUC and the appointed union representatives to try and address these challenges. Please refer to pages 114 and 127 for a description of the SKF WUC’s work related to collective bargaining agreements. Information on whichcountries SKF has operations in is available on skf.com/locations. 408-1 Operations and suppliers at signiﬁcant risk for incidents of child labour SKF considers the risk for child labour in SKF’s operations as small. The issue of child labour is nonetheless included in SKF’s internal audits. The risk for use of child labour at SKF suppliers is considered higher and SKF’s supplier audits have a high focus on this topic. In 2021, SKF found no actual cases of child labour at its own ope- rations and one case at SKF’s supplier in China (found at the end of 2021). The problem has been immediately solved by the supplier, but SKF decided to stop business with that supplier. 409-1 Operations and suppliers at signiﬁcant risk for incidents of forced or compulsory labour The issue of forced, bonded and compulsory labour is included in SKF’s Code of Conduct and internal and supplier audits. In 2021, two cases of forced or bonded labour have been identiﬁed in India. Immediate corrective actions have been taken and the concerns were addressed. The two suppliers are now under monitoring. SKF applies regional risk characterization from tools such as Maplecroft to help identify countries with these potential risks (407-1, 408-1, 409-1). 412-1 Operations that have been subject to human rights reviews or impact assessments SKF’s manufacturing units are subject to an ethics review including relevant aspects on the Code of Conduct with a risk-based periodi- city. In2021, eleven such reviews were carried out. In addition, sites undergo audits on speciﬁc topics and most audits related to human rights focus on health and safety. SKFalso carries out site audits at suppliers. Read more on the next page. Duty of companies • Policy commitment • Human rights due diligence – Assessing impact – Act on ﬁndings – Tracking effectiveness – Communicate • Stakeholder engagement • Remediation States duty to protect Access to remedy Companies duty to respect Protection of human rights 135 SKF Annual Report 2021 103-1 Materiality and boundaries SKF addresses supplier impact on the environment, human rights, labor practices and society under the Responsible sourcing pro- gramme. The programme covers all of SKF’s suppliers but uses a risk-based approach focusing auditing on tier one and sometimes tier two suppliers. Supplier assessments Screening of suppliers 1517 Americas Audits done Deviations found 52 Europe/Africa Audits done Deviations found 21153 India Audits done Deviations found 15951 China Audits done Deviations found External risk maps, combined with SKF’s operations and spend have resulted in aregion or country focus when it comes to risk assessment audits and follow-u ps. Direct impact on UN Sustainable Development Goals 103-2–103-3 Management approach, its components and evaluation SKF’s Responsible sourcing programme works to ensure the Group’s effective deployment of the SKF Code of Conduct for suppliers and sub-contractors. The programme is part of supplier development, which covers areas of delivery, quality, product comp- liance and Code of Conduct. All potential suppliers are initially screened using a set of minimum criteria related to the Code of Conduct and quality demands. These must be met in order to be considered as an SKF supplier. SKF’s responsible sourcing strategy uses a risk based approach, where direct material suppliers making up 90% are automatically subject to audits if they are located in high risk regions. These can be both tier one and tier two suppliers. In addition to these, when risks to people, the environment or business ethics are ﬂagged, during site visits or screenings, the suppliers are escalated to be audited. This can be any type of supplier, e.g. professional services or other indirect material. Screening of suppliers is done using SKF’s own risk tool and audits are always done on suppliers’ loca- tions by SKF specialists or third-party auditors. Warning signs may also be raised by other SKF staff visiting suppliers, such as during aquality review. The Code of Conduct audit procedure is based around a checklist with 62 speciﬁc questions focusing on a wide range of aspects, such as human rights and labor standards, environ ment, bribery, fraud, and other ethical guidance. Most non-compliance cases are managed by SKF’s regional purchasing ofﬁces. Signiﬁcant deviations are escalated to SKF Group’s Responsible Sourcing Committee. First and foremost, the work focuses on establishing a strong partnership and developing targeted suppliers. However, suppliers that fail to address critical issues over time risk having their contracts with SKF terminated. In 2021, unacceptable deviations were found at ten suppliers in India and China. nine cases were escalated to the Responsible Sourcing Committee, who decided to assign speciﬁc support to help these suppliers to improve. At the end of the year, most of the main problems have been solved and seven of the ten suppliers were con- ﬁrmed as business approved. Contracts were (or will be soon) ter- minated with the other three suppliers; sourcing with them has already been stopped, or will ﬁnish within 2022. One of these three is a case of child labor that has been found at the end of 2021 after the last RSC. The problem has been immediately solved by the supplier, but SKF has decided to stop business with it; progress will be followed up during the next RSC meeting. Material topics – GRI 414: Supplier social assessment 2016 and GRI 308: Supplier environmental assessment 2016 Management approach – General Disclosures 2016 SUSTAINABILITY STATEMENTS 136 SKF Annual Report 2021 During 2021, SKF worked to closer align quality and Code of Conduct audits, striving to improve the process of escalating war- ning signs found during any supplier visits to a full Code of Conduct audit. The most common deviations found are related to compensa- tion, work hours, health and safety, pollution and waste handling, ﬁre license and environmental permits. The data reported in these statements are consolidating SKF's ﬁndings into GRI's designations. 414-1, 308-1 New suppliers that were screened using social and environmental criteria All new suppliers of direct material in high risk countries are visited on site. In other countries, all new direct material suppliers are sub- ject to a modular quality audit, which could include or trigger a Code of Conduct audit. Major suppliers in high risk countries are subject to re-audit. Indirect material suppliers are audited when awarded strategic sourcing status. 2021 (like 2020) was heavily impacted by the COVID-19 pande- mic and major travel restrictions, in spite of this 123 suppliers have been physically audited. 20 out of 123 have been audited with out negative impact identiﬁed (no critical deviations). With the 103 other suppliers, all have conﬁrmed improvements, although with one of them business exit decision has been taken by SKF. 32 new suppliers were audited on site using environmental and social criteria, and all were approved to supply SKF. 414-2 Negative social impacts in the supply chain and actions taken In 2021, 326 deviations to the SKF Code of Conduct in this category have been identiﬁed and are being resolved in the operations. The most common deviations are related to occupational health and safety, work hours, compensation and employment contract proce- dures. Seven suppliers with major deviations have been escalated to the Responsible Sourcing Committee. All cases are prioritized and addressed according to their urgency. 308-2 Negative environmental impacts in the supply chain and actions taken In 2021, 64 environmental deviations related to pollution control and waste handling have been identiﬁed and actions are ongoing atthe suppliers to resolve them. SKF has the management systems, skills and experience to do this which is a competitive advantage in the local supplier development. Speciﬁc training programmes about Code of Conduct, as well as social and environmental matters, have been conducted in India and China with particular focus on suppliers having social and environmental issues, including direct and indirect material suppliers as well as sub-contractors and service providers. Around 51 suppliers attended the training in India and 12 in China. To strengthen these supplier follow-ups, local purchasing staff also have to be trained. With the intent to continuously monitor suppliers to convert negative impacts to positive, a pilot on a mobile app, “Connect@ CoC4S” has been launched in India and is now in use. The corrective and preventive actions are captured by SKF employees when visiting the suppliers. Material topic – GRI 419: Socioeconomic compliance 2016 Management approach – General Disclosures 2016 103-1 Materiality and boundaries SKF addresses socioeconomic compliance as part of the Group’s ethics and compliance programmes across the full value chain. Within this report, the focus is on SKF’s operations and parties with whom SKF has a direct business relationship. Compliance with international declarations, conventions, treaties and local regulation is one of the most important tasks amultinatio- nal enterprise can manage to support sustainable development. SKF works proactively to prepare for and live up tosuch requirements. 103-2–103-3 Management approach, its components and evaluation There is a Group-wide programme of online training courses, which are mandatory for all employees having an SKF email add- ress, with content about issues such as Data privacy (88%), Export Control (85%) Conﬂict of Interest (78%) Corruption (87%), Workplace harassment (88%) Diversity & Inclusion (86%), Reporting ethical concerns (88%) and Ethical leadership (84%). The numbers in brackets represents the % of the total number of the employees who have completed the training as per January 2022. One important compliance area for SKF is data privacy. The General Data Protection Regulation (GDPR) came into force within the EU in 2018 and puts clearer responsibility and higher accounta- bility on companies handling personal data. AsSKF shares informa- tion globally, these rules affect SKF also outside the EU. SKF meets this increased responsibility and has, forexample, established a data privacy policy, appointed data protection ofﬁcers, assessed and registered IT applications and reviewed supplier contracts. SKF monitors and follows closely the development and recommen- dations from the OECD and the European Union as regards tax transparency. In line with the OECD recommendations, Sweden has introduced rules on country by country reporting, and a report inclu- ding, e.g. income, proﬁt, taxes paid, employees and economic activity in each country, needs to be ﬁled with the Swedish Tax Authority. SKF has ﬁled such information but does not report publicly due to sensitive competitive information. Tax is an important sustainability topic and SKF makes its tax policy public on skf.com. The global bearing market, which is the main business of the SKF Group is made up of a small number of large enterprises. This is explained more on pages 6–7 and 40. This means that publicly disclosing earnings and tax per country, or even by region, would provide competitors with information on exactly where SKF does business and the size of it. This information would be highly valuable for any competitor. For this reason, SKF will not disclose tax or earnings by country publicly. In addition to the above topics and other socioeconomic areas reported within these statements, SKF works closely to ensure compliance to topics such as corruption, money laundering, export control and human rights. 419-1 Non-compliance with laws and regulations in the social and economic area No cases of non-compliance related to these topics have been identiﬁed. Socioeconomic compliance Direct impact on UN Sustainable Development Goals 137 SKF Annual Report 2021 The EU Taxonomy is a classiﬁcation system to help deﬁne environ- mentally sustainable economic activities to support the transition to an economy consistent with the EU's environmental objectives. A cross-functional team with members from sustainability, ﬁnance and investor relations has investigated the EU Taxonomy requirements and its relevance to SKF based on the EU Taxonomy Regulation 2020/852 and the related delegated regulations and annexes. The conclusion from the analysis is that since the manufacturing of components is currently not included in the economic activities covered by the EU Taxonomy, there is no material eligible turnover, CAPEX or OPEX for SKF. Turnover The interpretation of Annexes 1–5 of the Delegated regulations /2021/4987 section 1.1.1. is that SKF has no eligible turnover, as the Group's activities neither qualify as enabling nor are taxonomy eligible themselves, since the manufacturing of components is not covered. CAPEX The interpretation of Annexes 1–5 of the Delegated regulations /2021/4987 section 1.1.2.2. (a,b) is that SKF has no eligible CAPEX, since the manufacturing of components is not covered. According The EU Taxonomy toparagraph (c) SKF has some eligible CAPEX related to energy efﬁciency of buildings and solar panels, but the amount is not considered to be material as it represents less than 1% of theGroup'stotal CAPEX. OPEX The interpretation of Annexes 1-5 of the Delegated regulations /2021/4987 section 1.1.3.2. is that SKF has no eligible OPEX, sincethe manufacturing of components is not covered. Contextual information The EU Taxonomy does not cover SKF's operations as described above. Nevertheless, SKF takes sustainability and climate change seriously and has been doing so for many years. As described on pages 13 and 19 in this report, the Group has during 2021 deﬁned an even higher ambition level with the target to have net zero greenhouse gas emissions in the full supply chain by 2050. Since the launch in the end of 2019, the Group has now allocated the full EUR 300 million Green Bond to projects that support the transition to low-carbon, climate resilient growth and lower environ- mental impacts. This is an important part of SKF’s focus on redu- cing its own emissions as well as increasing investments in R&D, production, testing and remanufacturing capacity for products used in industries such as renewable energy generation, electric vehicles SUSTAINABILITY STATEMENTS 138 SKF Annual Report 2021 To AB SKF (publ), corporate identity number 556007-3495 Introduction We have been engaged by the Board of Directors of AB SKF (publ) to undertake a limited assurance engagement of the SKF Sustainability Report for the year 2021. The Company has deﬁned the scope of the Sustainability Report on page 2 and the Statutory Sustainability Report on page 110. Responsibilities of the Board of Directors and the Executive Management The Board of Directors and the Executive Management are respon- sible for the preparation of the Sustainability Report including the Statutory Sustainability Report in accordance with the applicable criteria and the Annual Accounts Act respectively. The criteria are deﬁned on page 110 in the Sustainability Report, and are part of theSustainability Reporting Guidelines published by GRI (Global Reporting Initiative), which are applicable to the Sustainability Report, as well as the accounting and calculation principles that theCompany has developed. This responsibility also includes the internal control relevant to the preparation of a Sustainability Reportthat is free from material misstatements, whether due to fraud or error. Responsibilities of the auditor Our responsibility is to express a conclusion on the Sustainability Report based on the limited assurance procedures we have perfor- med and to express an opinion regarding the Statutory Sustainabi- lity Report. Our engagement is limited to historical information pre- sented and does not cover future-oriented information. We conducted our limited assurance engagement in accordance with ISAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information. A limited assurance engagement consists of making inquiries, primarily of persons responsible for the preparation of the Sustainability Report, and applying analytical and other limited assurance procedures. Our examination regarding the Statutory Sustainability Report has been conducted in accordance with FAR’s accounting standard RevR 12 The auditor’s opinion regarding the Statutory Sustainability Report. Alimited assurance engagement and an examination according to Auditor’s Limited Assurance Report on the Sustainability Report and statement regarding the Statutory Sustainability Report RevR 12 is different and substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. The ﬁrm applies ISQC 1 (International Standard on Quality Con- trol) and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. We are independent of AB SKF in accordance with professional ethics for accountants in Sweden and have otherwise fulﬁlled our ethical responsibilities in accordance with these requirements. The limited assurance procedures performed and the examina- tion according to RevR 12 do not enable us to obtain assurance that we would become aware of all signiﬁcant matters that might be identiﬁed in an audit. The conclusion based on a limited assurance engagement and an examination according to RevR 12 does not provide the same level of assurance as a conclusion based on an audit. Our procedures are based on the criteria deﬁned by the Board ofDirectors and the Executive Management as described above. Weconsider these criteria suitable for the preparation of the Sustainability Report. We believe that the evidence we have obtained is sufﬁcient and appropriate to provide a basis for our conclusion below. Conclusion Based on the limited assurance procedures we have performed, nothing has come to our attention that causes us to believe that the Sustainability Report, is not prepared, in all material respects, in accordance with the criteria deﬁned by the Board of Directors and Executive Management. A Statutory Sustainability Report has been prepared. Gothenburg, 2 March 2022 Deloitte AB Lennart Nordqvist Expert Member of FAR Hans Warén Authorised Public Accountant 139 SKF Annual Report 2021 Corporate Governance Report Introduction SKF Care deﬁnes the Group’s approach to securing sustainable, positive development over the short, medium and long term. SKF applies the principles of sound corporate governance as an instru- ment for increased competitiveness and to promote conﬁdence in SKF among all stakeholders. Among other things, this means that the company maintains an efﬁcient organizational structure with clear areas of responsibility and clear rules for delegation, that the ﬁnancial, environmental and social reporting is transparent and that the company in all respects maintains good corporate citizenship. The corporate governance principles applied by SKF are based onSwedish law, in particular the Swedish Companies Act and the Swedish Annual Accounts Act, and the regulatory system of NASDAQ Stockholm AB (Stockholm Stock Exchange). Information under the Annual Accounts Act Chapter 6, § 6, sections 3–4, are found at page 46 of the Administration Report for the Group in the Annual Report 2021. Swedish Code of Corporate Governance The Swedish Code of Corporate Governance (the “Code”) was origi- nally introduced on 1 July 2005. The Code has been revised several times since the introduction and the applicable Code is available atthe website of the Swedish Corporate Governance Board, www.corporategovernanceboard.se. It is considered good stock exchange practice for Swedish com- panies whose shares are traded on a regulated market to apply the Code. SKF applies the Code, and this Corporate Governance Report has been prepared in accordance with the Code and the Swedish Annual Accounts Act. Furthermore, SKF has provided information on the company’s website in line with the Code requirements. The Annual General Meeting in 2021 was also held in accordance with the Code rules. The auditor of the company has read and performed a statutory examination of the Corporate Governance Report. General information about how the company is managed The shareholders’ meeting is the company’s highest decision-making body. The Annual General Meeting of shareholders shall be held within six months after the end of the ﬁnancial year. At the Annual General Meeting the shareholders exercise their voting rights for e.g. the composition of the Board of Directors, adoption of principles of remuneration for Group Management and election of external auditors. SKF has issued A and B shares. An A share entitles the shareholder to one vote and a B share to one-tenth of a vote. The Board of Directors has a responsibility for the company’s organisation and for the oversight of the management of the compa- ny’s affairs and is, together with the President and Group Manage- ment deﬁning and continuously monitoring SKF’s vision, mission, values and drivers. The Chairman of the Board of Directors shall direct the work of the Board and monitor that the Board of Direc- tors fulﬁls its obligations. The Board annually adopts written rules of procedure for its internal work and written instructions. For more details on the rules of procedures and the written instructions, see below under the heading “Activities of the Board of Directors”. The President of the company, who is also the Chief Executive Ofﬁcer, is appointed by the Board of Directors and handles the day- to-day management of the company’s business in accordance with the guidelines and instructions from the Board. The approval of theBoard is, for example, required in relation to investments and acquisitions above certain amounts, as well as for the appointment of certain senior managers. The President is supported by Group Management. As per 31 December 2021, SKF was organized in the following business areas; Industrial SalesAmericas, Industrial Sales Europe, Middle East and Africa, Industrial Sales Asia, Auto motive, SKF Technology and Industrial Technologies. The responsibility for end- to-end procurement, manufacturing and logistics is combined into Bearing Operations. Further, there are three Group staff units; Group staff units Sales/Operations Shareholders through shareholders’ meeting Board of Directors President and CEO Group Management Internal audit Audit Committee External auditors Remuneration Committee Nomination Committee 1 23 4 5 6 7 CORPORATE GOVERNANCE REPORT 140 SKF Annual Report 2021 Group Finance, IT, Marketing & Communication, Group People Experience and Group Legal, Reinsurance, Brand Protection and Real Estate & Facility Management, see pages 148–149 in the Annual Report 2021. Each Group staff unit had its own deﬁned area of responsibility and the task to deﬁne strategic directions and fundamental requirements within itsarea. The Director of Sustainability, reported directly to the Chief Executive Ofﬁcer and had thetask to assure that all relevant aspects of sustainability are addressed and integrated into operations and activities throughout the Group. Policies and instructions are in place toensure that matters of certain im portance are referred to the President and/or the Board of Directors. 1 Nomination Committee At the Annual General Meeting of AB SKF it was resolved that the company shall have a Nomination Committee formed by one representative of each of the four major shareholders with regard to the number of votes held as well as theChairman of the Board. When constituting the Nomination Committee, the shareholdings per the last banking day in August each year would determine which shareholders are the largest with regard to the number of votes held. The names of the four shareholder representatives were to be published as soon as they had been elected, however not later than six months before the next Annual General Meeting. The Nomi- nation Committee shall remain in ofﬁce until a new Nomination Committee has been appointed. In a press release on 8 September 2021, it was announced that a Nomination Committee consisting of the following representatives of the shareholders, besides the Chairman of the Board, had been appointed in preparation of the Annual General Meeting 2022: • Marcus Wallenberg, FAM • Anders Algotsson, AFA Försäkring • Anders Jonsson, Skandia • Joachim Spetz, Swedbank Robur Fonder The Nomination Committee is to furnish proposals in the following matters to be presented to, and resolved by, the Annual General Meeting in 2022: • proposal for Chairman of the Annual General Meeting • proposal for Board of Directors • proposal for Chairman of the Board of Directors • proposal for fee to the Board of Directors • to the extent deemed necessary, proposal for new instructions for the Nomination Committee. The proposals of the Nomination Committee werepublished in connection with the notice to the Annual General Meeting 2022. 2 The Board of Directors Composition and remuneration of the Board The Board shall, in addition to specially appointed members and deputies, according to the Articles of Association of SKF, comprise a minimum of ﬁve and a maximum of twelve Board members, with a maximum of ﬁve deputies. The Board members are elected each year at the Annual General Meeting for the period up to the end of the next Annual General Meeting. The Nomination Committee proposes decisions to the Annual General Meeting regarding electoral and remuneration issues, including proposals for the composition and remuneration of the Board. As reﬂected in the Nomination Committee’s statement regarding the composition of the proposed Board and the proposed remuneration presented to the Annual General Meeting 2021, the Nomination Committee has applied the provisions in the Code as diversity policy. The objectives of the diversity policy is for the Board to have a composition appropriate to the company’s operations, phase of development and other relevant circumstances; that the Board members elected by the shareholders’ meeting collectively are to exhibit diversity and breadth of qualiﬁcations, experience and background; and that the company is to strive for gender balance on the Board. The Annual General Meeting 2021 resolved to appoint Board members in accordance with the Nomination Committee’s proposal. Eight Board members, including the Chairman, were elected at AB SKF’s Annual General Meeting held in the spring of 2021. Alrik Danielson and Ronnie Leten resigned from the Board. In addition, the employees have appointed two Board members and two deputy Board members. No Board member, except for the President, isincluded in the management of the company. Information on the composition and remuneration of the Board members decided upon by the Annual General Meeting 2021 can befound in the Annual Report 2021, Consolidated Financial State- ments, Note 23. Independence requirements The Board of Directors has been considered to comply with the requirements regarding independence of the Code. The table below shows the Board member’s independence according to the require- ments of the Code in relation to the company and major shareholders. Name of the Board members elected by the Annual General Meeting Independence in relation to the company/senior management Independence in relation to the major shareholders of the company Hans Stråberg • • Hock Goh • • Barb Samardzich • • Colleen Repplier • • Geert Follens • • Håkan Buskhe • Susanna Schneeberger • • Rickard Gustafson • 141 SKF Annual Report 2021 Activities of the Board of Directors The Board held nine meetings in 2021. The Board members were present at the Board meetings as described in the table below. Name of the Board member Presence/Total number of meetings Hans Stråberg (chairman) 9/9 Hock Goh 9/9 Alrik Danielson (resigned in March 2021) 2/3 Ronnie Leten (resigned in March 2021) 3/3 Barb Samardzich 9/9 Colleen Repplier 9/9 Geert Follens 9/9 Håkan Buskhe 9/9 Susanna Schneeberger 9/9 Rickard Gustafson (elected in March 2021) 6/6 Jonny Hilbert 9/9 Zarko Djurovic 9/9 Thomas Eliasson (appointed in March 2021) 6/6 Steve Norrman (appointed in October 2021) 2/2 Kennet Carlsson (resigned in October 2021) 7/7 Claes Palm (resigned in March 2021) 3/3 The Board adopts written rules of procedure annually for its internal work. These rules prescribe i.a.: • the number of Board meetings and when they are to be held, • the items normally included in the Board agenda, and • the presentation to the Board of reports from the external auditors. The Board has also issued written instructions on: • when and how information required for the Board’s assessment of the company’s and the Group’s ﬁnancial position shall be collected and reported to the Board, and • the allocation of the tasks between the Board and the President. Issues dealt with by the Board in 2021 include i.a. appoinment of new CEO, market outlook and the impacts of the COVID-19 pan- demic, ﬁnancial reporting, capital structure, acquisitions and divestments of companies, the strategic direction and business planof the Group and management issues. The Board continuously evaluates economic, environmental and social aspects for the Group’s performance and reviews speciﬁc issues such as accident rates, greenhouse gas emissions and Code of Conduct adherence. Each new Board member has to go through a general introduction training about the SKF Group. The Board visits on a regular basis different SKF sites in order to enhance knowledge about the SKF Group, subject to COVID-19-related restrictions and recommen- dations. 3 Remuneration Committee The Board of AB SKF has in accordance with the principles in the Code established a Remuneration Committee consisting of the Chairman of the Board, Hans Stråberg as chairman, and the Board members Håkan Buskhe and Colleen Repplier. The Remuneration Committee prepares matters related to the principles of remuneration for Group Management and employment conditions for the President. The principles of remuneration for Group Management shall be submitted to the Board, which shall submit a proposal for such remuneration principles to the Annual General Meeting for approval at least every fourth year. The employment conditions for the President shall be approved by the Board. The Remuneration Committee continuously monitors and evalu- ates the SKF Group’s remuneration package for Group Management. Not later than three weeks prior to the Annual General Meeting the Board submits on the company’s website, in accordance with the Swedish Companies Act and the principles in the Code, a remunera- tion report. The Remuneration Committee held ﬁve meetings in 2021. The members of the committee were present at the meetings as follows: Name of the Board member Presence/ Total no. of meetings Hans Stråberg (chairman) 5/5 Håkan Buskhe 5/5 Ronnie Leten (resigned in March 2021) 2/2 Colleen Repplier (elected in March 2021) 3/3 Group staff units Sales/Operations Shareholders through shareholders’ meeting Board of Directors President and CEO Group Management Internal audit Audit Committee External auditors Remuneration Committee Nomination Committee 1 23 4 5 6 7 CORPORATE GOVERNANCE REPORT 142 SKF Annual Report 2021 4 Audit Committee The Board of AB SKF has in accordance with the principles ofthe Swedish Companies Act and the Code appointed an Audit Committee. The Audit Committee consists of the Board member Håkan Buskhe, as chairman, the Chairman of the Board, Hans Stråberg and the Board member Geert Follens. The Audit Committee oversees and ensures the quality and reliability of the accounting and ﬁnancial reporting processes and reports, monitors the effectiveness of the Group’s internal control over ﬁnancial reporting, audit and risk management processes and the adequacy of the Group’s controls for compliance with laws and regulations. The Audit Committee also reviews and monitors the work of external auditors as well as make preparations in relation to the nomination of external auditors. The Audit Committee held six meetings in 2021. The members of the committee were present at the meetings as follows: Name of the Board member Presence/Total number of meetings Hans Stråberg 6/6 Håkan Buskhe (chairman) 6/6 Ronnie Leten (resigned in March 2021) 1/1 Geert Follens (elected in March 2021) 5/5 Assessment The Board members assess the quality of the work of the Board through the completion of a questionnaire, which reﬂects the Group’s values and drivers. The result is then discussed at a Board meeting. The Nomination Committee has been provided with the result of the assessment. 5 President and Chief Executive Ofﬁcer Rickard Gustafson Rickard Gustafson, President and CEO of AB SKF since June 2021 (succeeding Alrik Danielson). Board member of AB SKF’s Board since 2021. Born 1964. Education and job experience Master of science from the Institute of Technology at Linköping University. His previous senior positions include president and CEO of the SAS Group, CEO of the insurance company Codan/Trygg- Hansa and several positions within General Electric. Other assignments Board member of Telia Company and Confederation of Swedish Enterprise. Shareholding (own and/or held by related parties) as of 31December 2021 4,350 SKF B Material shareholdings or other holdings (own and/or held by related parties) in companies with which the company has important business relationships: 0 6 The auditor of the company The task of the auditor is to audit, on behalf of the shareholders, the Annual Report and the accounting and also to audit the Board’s and the President’s management of the company. The Annual General Meeting elects the auditor for a period of four years. At AB SKF’s Annual General Meeting in the spring 2021, Deloitte AB (Deloitte) was elected as auditor for the time up to the closing of the Annual General Meeting in 2025, succeeding Price- waterhouseCoopers AB. Hans Warén is the auditor in charge. Hans Warén has many years of experience as auditor in a number of other listed companies, and is currently the lead auditor for Axfood, Industrivärden and Trelleborg. The auditor shall according to a resolution of the Annual General Meeting be remunerated in accordance with approved invoice. SKF has a procedure in place whereby all matters that are intended to be handled by the elected auditors are evaluated in relation to the independence requirements and are approved or, as the case may be, rejected, by the Audit Committee. Deloitte applies a similar procedure and issues annually, in addition thereto, a written state- ment to the Board stating that the audit ﬁrm is independent in relation to SKF. Deloitte has during 2021 been involved in matters besides the audit assignment. These matters have primarily concerned tax ser- vices. The total fees for Deloitte’s services besides auditing in 2021 amount to MSEK 10. Financial reporting The Board of Directors is responsible for documenting how the quality of the ﬁnancial reporting is secured and how the company communicates with its auditor. The Audit Committee assists the Board of Directors by prepara- tory work to secure the quality of the company’s ﬁnancial reporting. This is, for example, achieved through the Audit Committee’s review of the ﬁnancial information and the company’s internal ﬁnancial controls. The Board of Directors had one meeting with the auditors in 2021 and has been provided with the audit and its result. Within the scope of its work, which includes reviewing the extent of the exter- nal audit and evaluating the performance of the external auditors, the Audit Committee met with the auditors in connection with four Audit Committee meetings. In addition to that, the auditors gave both the Audit Committee and the Board of Directors information in writing regarding matters including the planning and implementation of the audit and an assessment of the risk position of the company. 143 SKF Annual Report 2021 The Board of Directors as of 31 December 2021  Jonny Hilbert Board member since 2015. Born 1981 Education and job experience Employed in the SKFGroup since 2005. Other assignments Chairman Unionen, SKF, Gothenburg. Shareholding (own and/or held byrelated parties) 0  Thomas Eliasson Deputy Board member since 2021. Born 1965 Education and job experience Employed in the SKF Group since 1984. Other assignments Chief Safety Representative and Board member ofUnionen at SKF in Gothenburg. Shareholding (own and/or held by related parties) 0  Zarko Djurovic Board member since 2015. Born 1977 Education and job experience Employed in the SKFGroup since 2006. Other assignments Chairman Metalworker’s Union, SKF, Gothenburg. Shareholding (own and/or held byrelated parties) 0  Steve Norrman Deputy Board member since 2021. Born 1965 Education and job experience Employed in the SKFGroup since 1994. Other assignments Vice Chairman and Safety Ofﬁcer Metalworker’s Union, SKF, Gothenburg. Shareholding (own and/or held byrelated parties) 0 EMPLOYEE REPRESENTATIVES  Geert Follens Board member since 2019 Born 1959 Education and job experience Master of Science in Electromechanical Engineering and a post graduate degree in Business Economics from the university of Leuven, Belgium. Senior Executive Vice President and Business Area President Vacuum Technique at Atlas Copco AB. Several leading posi- tions within the Atlas Copco Group in Sweden, Belgium and the U.K. since 1995, including General Manager of Atlas Copco Compressor Technique customer center, President of the Portable Energy division and President of the Industrial Air division. Shareholding (own and/or held by related parties) 1,500 SKF B  Håkan Buskhe Board member since 2020 Born 1963 Education and job experience Master of Science, Licentiate of E ngineering, Chalmers University ofTechnology. CEO of FAM AB, owned by Wallenberg Investments AB. His previous senior postitions include CEO ofSaab AB, 2010–2019 and CEOof E.ON Nordic AB, 2008–2010. Other assignments Chairman of IPCO AB, board member of FAM AB, Munters Group, Stora Enso Oyj and Kopparfors Skogar AB Shareholding (own and/or held by related parties) 0  Susanna Schneeberger Board member since 2020 Born 1973 Education and job experience Master of European Affairs (MBA) and Master of Science in International Busi- ness, Lund University. Senior advisor and several leading positions including Chief Digital Ofﬁcer and executive board member of the KION Group, 2018–2020, CEO of Demag Cranes & Components, 2015–2018, and various positions in the Trelleborg Group 2007–2014. Other assignments Board member of Concentric AB and Hempel A/S. Shareholding (own and/or held byrelatedparties) 1,000 SKF B  Rickard Gustafson President and Chief Executive Ofﬁcer of AB SKF. For more details, see page 149.  Hans Stråberg Chairman, Board member since 2018 Born 1957 Education and job experience Master of Science in Engineering from Chalmers University of Technology, Gothen burg. President and CEO of Electrolux AB 2002–2010. Several leading positions within the Electrolux Group in Sweden and USA since 1983. Former EU Co-Chair TABD, Trans- Atlantic Business Dialogue. Other assignments Chairman of Atlas Copco AB, Roxtec AB, CTEK AB and Anocca AB. Board mem- ber of Investor AB and Mellby Gård AB. Shareholding (own and/or held byrelatedparties) 37,000 SKF B  Hock Goh Board member since 2014 Born 1955 Education and job experience Bachelor’s degree (honours) in Mechanical Engineering from Monash University, Australia, completed the Advanced Management Program at INSEAD. Operating Partner ofBaird Capital Partners Asia, 2005–2012. Several senior management positions in Schlumberger Limited, 1995–2005, President of Network and Infrastruc- ture Solutions division in London, President Asia and Vice President and General Manager China. Other assignments Member of the Board of Stora Enso Oyj and Santos Australia. Shareholding (own and/or held byrelated parties) 0  Barb Samardzich Board member since 2017 Born 1958 Education and job experience Bachelor of Science in Mechanical Engineering, University of Florida, Master ofScience in Mechanical Engineering, Carnegie Mellon Univer sity, Master of Science in Engineering Management, Wayne State University. Various manage ment positions at Ford Motor Company, 1990–2016, the latest asCOO of Ford Europe, 2013–2016. Engineer in the Commercial Nuclear Fuel Division at Westing house Electric Corpo ration, 1981–1990. Other assignments Board member of Adient plc and Bombardier Recreational Products. Shareholding (own and/or held by related parties) 0  Colleen Repplier Board member since 2018 Born 1960 Education and job experience Bachelor’s degree in Electrical Engi- neering, University of Pittsburgh and MBA from the University of Central Florida. Vice president and general manager ofJohnson Controls 2016– 2018. Several leading positions within Tyco 2007–2016 and Home Depot 2005–2007, and in the energy industry within GE Energy 1994–2003, Bechtel Corporation 1992–1994 and Westing- house 1983–1992. Other assignments Board member of Kimball Electronics and Triumph Group. Shareholding (own and/or held byrelated parties) 0 CORPORATE GOVERNANCE REPORT 144 SKF Annual Report 2021 Hans Warén Authorized Public Accountant Deloitte AB AUDITOR             145 SKF Annual Report 2021 Internal control and risk management regarding ﬁnancial reporting 7 SKF applies the Internal Control Integrated Framework launched in1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In 2013 COSO launched an updated version of the framework. SKF’s internal control framework is aligned with the 17 fundamental principles of COSO 2013. The COSO framework consists ofﬁve interrelated components. The control environment component is the foundation for the other components. Through its policies, instructions and organiza- tional structure SKF has documented the division of responsibility throughout the SKF organization. This is reﬂected in the fact that policies and instructions, where applicable, are developed on the basis of internationally accepted standards and/or best practice. Policies and instructions are reassessed by the responsible function based on the need to adapt these to changes in requirements and legislation. SKF is a process-oriented company and includes integrated risk assessment with the business processes such as business planning. In the area of control activities, SKF has documented all the critical ﬁnance processes and controls for the parent company and subsidi- ary companies. SKF has implemented these requirements as a Group standard, the SKF Internal Control Standard (SICS) for all Group companies. The documentation standards require that relevant controls in the business processes are described and performed. When deﬁciencies in individual controls are identiﬁed, action plans are created to remediate control gaps. A selection of deﬁned control activities are tested annually. SKF has a risk approach to controls, control testing and actions to remediate con- trol gaps. During 2021 the control test activities have been limited due to the COVID-19 pandemic and been performed primarily through testing of controls in the newly established Finance Operations Centers and through self assessments. SKF has information and communication systems and procedures in place in order to ensure the completeness and correctness of theﬁnancial reporting. Accounting and reporting instructions are updated when necessary. These instructions are available to all relevant employees together with training programmes. Changes to accounting and reporting instructions are communicated regularly. Information on COSO components of monitoring, information and communication, ﬁnancial risk assessment, control environment, test and review protocols as well as test results are stored in a special IT System. Detailed ﬁnancial process and control documentation are stored centrally and/or locally. This enables access to individual control documentation and analysis of results from the testing of SKF’s ﬁnancial internal control system. The implementation of SICS consisted primarily of adapting the process and control descriptions to a common framework and putting in place a comprehensive system for management testing of the controls. SKF applies a risk-based annual testing programme of selected units and critical controls. The test programme is reassessed annually. SKF has an internal control function, within SKF Group Compliance & Assurance, with the main responsibility to support the business to implement and maintain good internal control as well as to perform control testing to evaluate adherence with the framework and iden- tify control weaknesses. The internal audit department Compliance & Assurance conducts high level risk-based audits within prioritized areas. The Director, Group Compliance & Assurance reports to the Group’s Chief Financial Ofﬁcer and regularly submits reports tothe Audit Committee of the Board of Directors. The Board of Directors receives regular ﬁnancial reports and the Group’s ﬁnancial position and development are discussed at every meeting. The Audit Com- mittee of the Board of Directors reviews all interim and annual ﬁnancial reports before they are released to the public. Gothenburg, 2 March 2022 The Board of Directors © 2013 Internal Control- Integrated Framework Committee of Sponsoring Organizations of the Treadway Commission (COSO). All rights reserved. Used with permission. Operations Control Environment Risk Assessment Control Activities Information & Communications Monitoring activities Entity Level Division Operating Unit Function Reporting Compliance Group staff units Sales/Operations Shareholders through shareholders’ meeting Board of Directors President and CEO Group Management Internal audit Audit Committee External auditors Remuneration Committee Nomination Committee 1 23 4 5 6 7 CORPORATE GOVERNANCE REPORT 146 SKF Annual Report 2021 Auditor’s report on the Corporate Governance Statement To the general meeting of the shareholders in AB SKF (publ), corporate identity number 556007-3495 Engagement and responsibility It is the Board of Directors who is responsible for the corporate governance statement for the ﬁnancial year 2021-01-01 –2021-12-31 on pages 139–146 and that it has been prepared in accordance with the Annual Accounts Act. The scope of the audit Our examination has been conducted in accordance with FAR’s standard RevU 16 The auditor’s examination of the corporate governance statement. This means that our examination of the corporate governance statement is different and substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that the examination has provided us with sufﬁcient basis for our opinions. Opinions A corporate governance statement has been prepared. Disclosures in accordance with chapter 6 section 6 the second paragraph points 2–6 the Annual Accounts Act and chapter 7 section 31 the second paragraph the same law are consistent with the annual accounts and the consolidated accounts and are in accordance with the Annual Accounts Act. Gothenburg, 2 March 2022 Deloitte AB Hans Warén Authorised Public Accountant 147 SKF Annual Report 2021           Changes to Group Management in 2021 Alrik Danielson stepped down from his role as President and CEO in April 2021. 148 SKF Annual Report 2021  Kent Viitanen President, Bearing Operations Born 1965 Business and Economics, School of Business, Economics and Law, Univer sity of Gothenburg. Employed since 1988 Previous positions Senior Vice President People, Communi cation and Quality, Director Renewable Energy and several other positions within SKF. Board member Chalmers University of Tech nology Shareholding in SKF 140 SKF A and 18,962 SKF B  Ann-Soﬁe Zaks Senior Vice President, Group People Experience Born 1976 Bachelor’s degree, Innovation Program with special focus on Behavioural Science from University college of Mälardalen. Employed since 2001 Previous positions People Experience Director Bearing Operations, Program manager, Group People Transformation initiative and several other positions within SKF. Shareholding in SKF 4,928 SKF B  Mathias Lyon General Counsel and Senior Vice President, Group Legal, Reinsurance, Brand Protection and Real Estate & Facility Management- Born 1975 Master of Laws, Faculty of Law atLund University. Employed since 2012 Previous positions SKF Deputy General Counsel and several other positions at Volvo, AstraZeneca, Mannheimer Swartling and Rosengrens. Shareholding in SKF 1,625 SKF B  Thomas Fröst President, Industrial Technologies Born 1962 Degree in Industrial Economics from ChalmersUniversity of Technology. Employed since 1988 Previous positions Director Industrial Units, Head of Industrial Marketing, and several otherpositions within SKF. Shareholding in SKF 1,248 SKF B  Rickard Gustafson President and CEO Born 1964 MSc from the Institute of Technology at Linköping University, Sweden. Employed since June 2021 Previous positions President and CEO of SAS Group, CEO of Codan/Trygg Hansa and he has held several positions within General Electric. Board member Telia Company and The Confederation of Swedish Enterprise Shareholding in SKF 4,350 SKF B  Niclas Rosenlew Chief Financial Ofﬁcer och Senior Vice President, Group Finance Born 1972 Master of Science in Finance, Hanken, Swedish School of Economics. Employed since 2019 Previous positions CFO of Basware and senior positions within Microsoft, Nokia and Deutsche Bank. Shareholding in SKF 8,640 SKF B  Erik Nelander President, Industrial Sales Europe and Middle East and Africa Born 1963 Master of Science in Business Administration and International Economics, School of Business, Economics and Law, University of Gothenburg. Employed since 1987 Previous positions Vice President SKF Industrial Market, President SKF China, Business Unit Director SKFAerospace, and several other positions within SKF. Shareholding in SKF 20,245 SKF B  Patrick Tong President, Industrial Sales Asia, Born 1962 Executive Master’s Degree of Business Administration, Hong Kong University of Scienceand Technology. Employed since 1989 Previous positions President Specialty Business, President SKFSecond Brands Bearings, as well as several other positions within SKF. Shareholding in SKF 23,579 SKF B  Victoria Van Camp CTO and President, SKF Technology Born 1966 Master of Science in Mechanical Engineering, PhDin Machine Elements; Luleå University of Techno logy, Sweden. Employed since 1996 Previous positions President Business and Product Development, Director Industrial Market Technology and Solutions, Director of Product Innovation Lubrication BU, as well as several other positionswithin SKF. Board member BillerudKorsnäs AB, Amexci AB and SKF India Ltd. Shareholding in SKF 18,300 SKF B  John Schmidt President, Industrial Sales Americas Born 1969 Bachelor of Science, Mechanical Engineering from the Pennsylvania State University. Employed since 2001 and 1993–1998 Previous positions President and CEO SKF USA Inc, Vice President Industrial Market NAM and several other positions within SKF. Shareholding in SKF 22,989 SKF B Group Management as of 31 December 2021 149 SKF Annual Report 2021            150 SKF Annual Report 2021  Thomas Fröst President, Independent and Emerging Business Born 1962 Degree in Industrial Economics from ChalmersUniversity of Technology. Employed since 1988 Previous positions President, Industrial Technologies, Director Industrial Units, Head of Industrial Marketing, and several otherpositions within SKF. Shareholding in SKF 1,904 SKF B  Victoria Van Camp CTO and Senior Vice President, Technology Development Born 1966 Master of Science in Mechanical Engineering, PhDin Machine Elements; Luleå University of Techno logy, Sweden. Employed since 1996 Previous positions President Business and Product Development, Director Industrial Market Technology and Solutions, Director of Product Innovation Lubrication BU, as well as several other positionswithin SKF. Board member BillerudKorsnäs AB, Amexci AB and SKF India Ltd. Shareholding in SKF 20,195 SKF B  Ann-Soﬁe Zaks Senior Vice President, Group People Experience and Communication Born 1976 Bachelor’s degree, Innovation Program with special focus on Behavioural Science from University college of Mälardalen. Employed since 2001 Previous positions People Experience Director Bearing Operations, Program manager, Group People Transformation initiative and several other positions within SKF. Shareholding in SKF 5,584 SKF B  Mathias Lyon General Counsel and Senior Vice President, Group Legal and Compliance Born 1975 Master of Laws, Faculty of Law atLund University. Employed since 2012 Previous positions General Counsel and Senior Vice President, Group Legal, Reinsurance, Brand Protection and Real Estate & Facility Management, SKF Deputy General Counsel and several other positions at Volvo, AstraZeneca, Mannheimer Swartling and Rosengrens. Shareholding in SKF 2,062 SKF B  Niclas Rosenlew Chief Financial Ofﬁcer and Senior Vice President, Group Finance Born 1972 Master of Science in Finance, Hanken, Swedish School of Economics. Employed since 2019 Previous positions CFO of Basware and senior positions within Microsoft, Nokia and Deutsche Bank. Shareholding in SKF 8,640 SKF B  Joakim Landholm Senior Vice President, Operations and Digital Transformation Born 1969 MSc Stockholm School of Economics. Employed since February 2022 Previous positions CEO Hector Rail, Chief Commercial Ofﬁcer SAS and senior positions at Codan/Trygg Hansa and GE Capital. Shareholding in SKF 0 SKF B  Rickard Gustafson President and CEO Born 1964 MSc from the Institute of Technology at Linköping University, Sweden. Employed since June 2021 Previous positions President and CEO of SAS Group, CEO of Codan/Trygg Hansa and he has held several positions within General Electric. Board member Telia Company and The Confederation of Swedish Enterprise Shareholding in SKF 9,600 SKF B  John Schmidt President, Industrial Region Americas Born 1969 Bachelor of Science, Mechanical Engineering from the Pennsylvania State University. Employed since 2001 and 1993–1998 Previous positions President, Industrial Sales Americas, President and CEO SKF USA Inc, Vice President Industrial Market NAM and several other positions within SKF. Shareholding in SKF 25,883 SKF B  Manish Bhatnagar President, Industrial Region India and Southeast Asia Born 1969 Master of Business Administration from Indian Institute of Management, Calcutta, and B.E. in Electronics Engineering from Birla Institute of Technology & Science, Pilani, India. Employed since 2018 Previous positions Senior roles at General Electric and Danaher. Shareholding in SKF 14,430 SKF B  Patrick Tong President, Industrial Region Northeast Asia Born 1962 Executive Master’s Degree of Business Administration, Hong Kong University of Scienceand Technology. Employed since 1989 Previous positions President, Industrial Sales Asia, President Specialty Business, President SKFSecond Brands Bearings, as well as several other positions within SKF. Shareholding in SKF 26,002 SKF B  David Johansson President, Automotive Born 1980 Master in Science; Industrial Marketing, Electrical Engineering at Chalmers University of Technology, Gothenburg. Employed since 2005 Previous positions Director, Global Railway and China Mobility business, Director, China Automotive, Aerospace and Railway business, Drector, Global Marine Business Unit and several other positions within SKF. Shareholding in SKF 0 SKF B  Kent Viitanen President, Industrial Region Europe, Middle East and Asia Born 1965 Business and Economics, School of Business, Economics and Law, Univer sity of Gothenburg. Employed since 1988 Previous positions President, Bearing Operations, Senior Vice President People, Communi cation and Quality, Director Renewable Energy and several other positions within SKF. Board member Chalmers University of Tech nology Shareholding in SKF 140 SKF A and 20,857 SKF B Group Management as of 15 February 2022 151 SKF Annual Report 2021 Seven-year review MSEK unless otherwise stated 2021 2020 2019 2018 2017 2016 2015 Income statements Net sales 81,732 74,852 86,013 85,713 7 7,93 8 72,589 75,788 Operating expenses incl. associated comp. –70,974 – 67,78 3 –76,618 –74,664 –69,346 –65,062 –68,820 Operating proﬁt 10,758 7,069 9,395 11,049 8,592 7,527 6,968 Financial income and expense, net –695 –769 –926 –861 –934 –788 –1,134 Proﬁt before taxes 10,063 6,300 8,469 10,188 7,65 8 6,739 5,834 Taxes –2,484 –1,826 –2,677 –2,603 –1,898 –2,530 –1,760 Net proﬁt 7,579 4,474 5,792 7,585 5,760 4,209 4,074 Balance sheets Intangible assets 16,942 16,242 18,397 17,722 17, 360 19,568 21,485 Deferred tax assets 3,839 4,800 4,437 3,563 3,633 3,806 3,185 Property, plant and equipment 20,723 18,161 18,420 16,688 15,762 15,746 15,303 Right of use assets 2,661 2,517 2,991 — — — — Non-current ﬁnancial and other assets 1,674 1,939 2,019 1,964 1,627 1,688 1,607 Inventories 20,997 15,733 18,051 17,8 26 17,122 15,418 14,519 Trade receivables 13,972 12,286 14,006 13,842 13,416 13,462 11,777 Other current assets 18,820 18,879 15,787 15,568 12,283 14,219 11,857 Total assets 99,628 90,557 94,108 87,173 81,203 83,907 79,733 Equity 45,365 35,712 37,366 35,452 29,823 27,683 26,282 Provisions for post-employment beneﬁts 11,781 15,170 15,366 12,894 12,309 13,945 13,062 Deferred tax provisions 1,040 792 960 1,118 1,100 1,380 1,373 Other provisions 2,517 3,482 2,474 2,541 2,275 2,224 2,095 Financial liabilities 19,336 18,349 19,017 17,157 18,508 23,650 23,825 Trade payables 9,881 8,459 8,266 7,8 31 7,899 7, 10 0 5,671 Other liabilities 9,709 8,593 10,659 10,180 9,289 7,925 7,425 Total equity and liabilities 99,628 90,557 94,108 87,173 81,203 83,907 79,733 Key ﬁgures 1) (in % unless otherwise stated) Operating margin 13.2 9.4 10.9 12.9 11.0 10.4 9.2 EBITA, MSEK 11,340 7,6 8 1 10,008 11,541 9,064 8,016 7,522 EBITDA, MSEK 14,064 10,470 12,892 13,522 10,916 9,895 9,826 Return on capital employed 14.8 9.8 13.2 17.6 14.2 11.9 10.9 Return on equity 18.8 12.1 15.7 22.8 20.4 16.5 15.7 Net working capital, % of sales 30.7 26.1 27.7 27.8 29.0 30.0 27.2 Net debt/equity 38.3 51.7 59.3 49.1 71.3 84.4 99.9 Turnover of total assets, times 0.85 0.79 0.90 1.00 0.96 0.89 0.92 Gearing 40.5 48.0 47.1 45.0 49.9 55.3 56.7 Equity/assets 45.5 39.4 39.7 40.7 36.7 33.0 33.0 Net cash ﬂow after investments before ﬁnancing, MSEK 2,100 5,259 4,953 8,326 4,753 7,717 6,416 Investments and employees Additions to property, plant and equipment, MSEK 3,822 3,332 3,461 2,647 2,243 1,869 2,063 Research and development expenses, MSEK 2,751 2,515 2,691 2,591 2,395 2,246 2,372 Patents – number of ﬁrst ﬁlings 241 200 201 202 192 191 461 Average number of employees 40,861 38,385 41,559 42,565 43,814 43,508 44,305 Number of employees registered at 31 December 42,602 40,963 43,360 44,428 45,678 44,868 46,635 1) See page 154 for deﬁnitions. SKF has applied the guidelines issued by ESMA(European Securities and Markets Authority) on APMs (Alternative Performance Measures). These key ﬁgures are not deﬁned or speciﬁed inIFRS but provides complementary information to investors and other stakeholders on the company’s performance. For the reconciliation of each APMagainst the most reconcilable line item inthe ﬁnancial statements, see investors.skf.com. 152 SKF Annual Report 2021 SKF GROUP Three-year review Distribution of shareholding Shareholding Number of shareholders % Number of shares % 1–1,000 60,769 87.5 13,912,259 3.2 1,001–10,000 7,836 11.3 21,117,029 4.6 10,001–100,000 631 0.9 18,046,739 3.9 100,001– 217 0.4 344,777,207 75.7 Anonymous ownership — — 57,497,83 4 12.6 69,453 100 455,351,068 100 Source: Monitor, Modular Finance as of 31 December 2021. Per-share data 1) SEK per share unless otherwise stated 2021 2020 2019 2018 2017 2016 2015 Earnings per share 16.10 9.44 12.20 16.0 12.02 8.75 8.52 Dividend per A and B share 7.0 0 2) 6.50 3.00 6.00 5.50 5.50 5.50 Total dividends, MSEK 3,188 2) 2,960 1,366 2,732 2,504 2,504 2,504 Purchase price of B shares at year-end on NASDAQ Stockholm 214.5 213.4 189.4 134.5 182.2 167.6 137. 2 Equity per share 96 75 78 74 62 57 54 Yield in percent (B) 3.3 2) 3.0 1.6 4.5 3.0 3.3 4.0 P/E ratio, B (share price/earnings per share) 13.3 22.6 15.5 8.4 15.2 19.2 16.1 Cash ﬂow from operations, per share 11.5 18.2 20.7 18.3 14.1 15.7 17.0 Cash ﬂow, after investments and before ﬁnancing, per share 4.6 11.6 10.9 18.3 10.4 17.0 14.1 1) See page 154 for deﬁnitions. 2) According to the Board’s proposal for the year 2021. MSEK unless otherwise stated 2021 2020 1) 2019 1) Industrial Net sales 58,559 53,912 61,031 Operating proﬁt 9,309 6,691 8,579 Operating margin, % 15.9 12.4 14.0 Assets and liabilities, net 42,612 38,508 42,949 Registered number of employees 34,702 33,157 35,839 Automotive Net sales 23,173 20,940 24,983 Operating proﬁt 1,450 378 816 Operating margin, % 6.3 1.8 3.3 Assets and liabilities, net 10,769 9,358 11,954 Registered number of employees 6,421 6,351 6,850 1) Previously published amounts have been restated to conform to the current Group structure. For more information refer to Note 2 in the consolidated ﬁnancial statements. 153 SKF Annual Report 2021 Adjusted operating proﬁt Operating proﬁt excluding items affecting comparability. Average number of employees Total number of working hours of regis- tered employees, divided by the normal total working time for the period. Basic earnings per share in SEK (as deﬁned by IFRS) Net proﬁt less non-controlling interests divided by the ordinary number of shares. Currency impact on operating proﬁt The effects of both translation and trans- action ﬂows based on current assumptions and exchange rates compared to the corresponding period last year. Debt Loans plus provisions for post- employment beneﬁts, net. Diluted earnings per share Calculated by using the weighted average number of shares outstanding during the period adjusted for all potential dilutive ordinary shares. Dividends pay-out ratio Dividends paid in relation to net income for the year the dividend relates to. EBITA (Earnings before interest, taxesand amortization) Operating proﬁt before amortizations. EBITDA (Earnings before interest, taxes, depreciation and amortization) Operating proﬁt before depreciations, amortizations, and impairments. Equity/assets ratio Equity as a percentage of total assets. Equity per share Equity excluding non-controlling interests divided by the ordinary number of shares. Gearing Debt as a percentage of the sum of debt andequity. Items affecting comparability Signiﬁcant income/expenses that affects comparability between accounting periods. This includes, but is not limited to, restruc- turing costs, impairments and write-offs, currency exchange rate effects caused by devaluations and gains and losses on divestments of businesses. Net debt Debt less short-term ﬁnancial assets excluding derivatives. Net debt/EBITDA Net debt, as a percentage of twelve months rolling EBITDA. Net debt/equity Net debt, as a percentage of equity. Net working capital as % of annual sales (NWC) Trade receivables plus inventory minus trade payables as a percentage of twelvemonths rolling net sales. Net worth per share (Equity per share) Equity excluding non-controlling interests divided by the ordinary number of shares. Operating margin Operating proﬁt, as a percentage of net sales. Operational performance Includes the effects on operating proﬁt related to changes in organic sales, manu- facturing volumes and manufacturing cost and changes in selling and administrative expenses. Deﬁnitions Revenue growth Sales excluding effects of currency and divested businesses. P/E ratio Share price at year end divided by basic earnings per share. Registered number of employees Total number of employees included in SKF’s payroll at the end of the period. Return on capital employed (ROCE) Operating proﬁt plus interest income, as a percentage of twelve months rolling average of total assets less the average ofnon-interest bearing liabilities. Return on equity (ROE) Net income as a percentage of twelve months rolling average of equity. Turnover of total assets Net sales in relation to twelve-month rolling average of total assets. Total value added (TVA) TVA is the operating proﬁt, less the pre-tax cost of capital. The pre-tax cost ofcapital isbased on a weighted cost of capital with arisk premium of 6% above the risk-free interest rate. 154 SKF Annual Report 2021 Contact information Patrik Stenberg Director SKF Group Investor Relations and Mergers & Acquisitions email: [email protected] www.investors.skf.com Theo Kjellberg Director Group Communication email: [email protected] SKF Group Headquarters SE-415 50 Gothenburg, Sweden Telephone: +46 31 337 10 00 www.skf.com Company reg.no 556007-3495 General information Annual General Meeting The Annual General Meeting will be held on Thursday, 24March 2022. Due to COVID-19, the Board of Directors hasdecided that the gen- eral meeting should be held without physical presence by inviting the shareholders to exercise their voting rights only by postal voting. There will be no meeting with a possibility to attend physically or by proxy; hence, the meeting will be held without physical presence. Information on the resolutions adopted by the general meeting will be published on 24 March 2022 as soon as the results of the postal vote has been ﬁnalized. For further information, see the heading “Postal voting” below. An address from the President and the auditor will be available atthe company’s website, www.skf.com, latest by 22 March 2022. Preconditions for participation For the right to participate at the Annual General Meeting, share- holders must be recorded in the shareholders’ register kept by Euroclear Sweden AB as per Wednesday, 16 March 2022 and must notify its intention to participate to the company at the latest on 23 March 2022 by casting its postal vote in accordance with the instruc- tions under the heading “Postal voting” below so that the postal vot- ing is received by the company through Computershare AB no later than 23March 2022. Shareholders whose shares are registered in the name of a trustee must have the shares registered temporarily in their own name inorder to take part in the Annual General Meeting. Any such re- registration for the purpose of establishing voting rights made by thetrustee latest by 18 March 2022 are taken into account in the production of the share register. This means that the share- holder should give notice of his/her wish to be included in the share- holders’ register to the trustee well in advance, in accordance with the trustee’s procedures. Postal voting Shareholders may exercise their voting rights at the Annual General Meeting only by voting in advance, so-called postal voting in accord- ance with the Act on temporary exceptions to facilitate the execution of general meetings in companies and other associations. A special form shall be used for postal voting. The form is available on www.skf.com. The postal voting form is considered as the notiﬁca- tion of participation. The completed voting form must be received by SKF through Computershare AB no later than 23 March 2022. The form may be submitted by post to Computershare AB, ”AGM 2022 of AB SKF”, Box5267, 102 46 Stockholm or via e-mail to [email protected]. Shareholders may also cast their postal votes electronically through Swedish BankID veriﬁcation via SKF’s website www.skf.com. Share- holders who are represented by a proxy holder shall submit a proxy form enclosed to the voting form. If the shareholder is a legal entity, acertiﬁcate of incorporation or a corresponding document shall be enclosed to the form. Shareholders are not permitted to add special instructions or conditions to their postal votes. If this is done, the vote (i.e. the postal vote in its entirety) will be invalid. Further instructions and conditions can be found in the notice of Annual General Meeting and on the postal voting form. Payment of dividend The Board of Directors proposes a dividend of SEK 7.00 per share for 2021. Monday, 28 March 2022 is proposed as the record date for shareholders to be entitled to receive dividends for 2021. Subject to resolution bythe Annual General Meeting, it is expected that Euroclear will distribute thedividend on Thursday, 31 March 2022. Financial information and reporting Publishing dates for ﬁnancial reports in 2022: Annual Report 2021 2 March Q1 report 26 April Q2 report 20 July Q3 report 25 October Q4 report 2 February 2023 The reports are available in Swedish and English on investors.skf.com. Asubscription service for press releases and interim reports, sent via e-mail or SMS, isavailable on the website. 155 SKF Annual Report 2021 Remuneration Report 2021 156 SKF Annual Report 2021 Introduction This remuneration report provides an outline of how AB SKF’s prin- ciples for remuneration for Group Management (the “remuneration principles”), adopted by the Annual General Meeting 2020, have been implemented in 2021. The report also provides details on the remuneration of AB SKF’s CEO. In addition, the report contains a summary of AB SKF’s outstanding share and share-price related incentive programs. The report has been prepared in compliance with Chapter 8, Sections 53 a and 53 b of the Swedish Companies Act (2005:551) and the Remuneration Rules issued by the Swedish Corporate Governance Board. Information required by Chapter 5, Sections 40–44 of the Annual Accounts Act (1995:1554) is available in note 23 on pages 86–89 in the company’s annual report for 2021 (the “annual report 2021”). Information on the work of the Remuneration Committee in 2021 is set out in the corporate governance report, which is available on pages 140–146 in the annual report 2021. Remuneration of the Board of Directors is not covered by this report. Such remuneration is resolved annually by the Annual General Meeting and disclosed in note 23 on pages 86–89 in the annual report 2021. Key developments 2021 The CEO summarizes the company’s overall performance in his statement on pages 10–13 in the annual report 2021. Overview of the application of the remuneration principles in 2020 The objective of the remuneration principles is to ensure that the SKF Group can attract and retain the best people in order to con- tribute to the SKF Group’s mission and business strategy, its long- term interests and sustainability. Remuneration for Group Manage- ment shall be based on market competitive conditions and at the same time support the shareholders’ best interests. Variable salary covered by the principles shall be linked to predetermined and measurable criteria, aiming to promote the SKF Group’s business strategy and long-term interests, including its sustainability. The total remuneration package for a Group Management member shall consist of the following components: ﬁxed salary, variable salary, pension beneﬁts, conditions for notice of termination and severance pay, and other beneﬁts such as a company car. The components shall create a well-balanced remuneration reﬂecting individual performance and responsibility as well as the SKF Group’s overall performance. The Annual General Meeting may also –irrespective of the principles – resolve on other remuneration components, e.g. SKF’s Performance Share Programme. The principles are found at www.skf.com. The remuneration principles, adopted by the Annual General Meeting 2020, have been fully implemented. The Board has decided on one partial deviation from the prin- ciples which is accounted for below in the section Application of performance criteria. No derogations from the procedure for imple- mentation of the principles have been made. The auditor’s report regarding the company’s compliance with the principles is available on www.skf.com. No remuneration has been reclaimed. In addition to remuneration covered by the remuneration prin- ciples, the Annual General Meetings of the company have resolved to implement SKF Performance Share Programme for senior mana gers and key employees Application of performance criteria The performance measures for the CEO’s variable remuneration have been selected to deliver the company’s strategy and to encour- age behavior which is in the long-term interest of the company. In the selection of performance measures, the strategic objectives, sustainability, short-term and long-term business priori ties for 2021 have been taken into account. The performance measures for the CEO’s variable cash remu- neration have been divided equally between adjusted operating proﬁt and cash ﬂow. To determine the range for the parameters, the ﬁnal result of the year before is the baseline. During 2021, the criteria for adjusted operating proﬁt were partly met but the criteria for cash ﬂow were not met. The outcome was therefore that 48% of the maximum variable cash remuneration was earned by the CEO Table 1 – Total CEO remuneration in 2021 (kSEK) Table 1 below sets out total remuneration earned by AB SKF’s CEO current and former during 2021 1) . Fixed remuneration Variable remuneration Extraordinary items Pension expense Total remuneration Proportion of ﬁxed and variable remunerationTotal remuneration 2) Base salary Other beneﬁts One-year variable Multi-year variable 3) Rickard Gustafson CEO (Current) 8,175 102 2,747 — 114 4) 3,036 14,174 81% / 19% Niclas Rosenlew Acting CEO (Former) 5) 458 0 145 — — 160 763 81% / 19% Alrik Danielson CEO (Former) 5,128 18 1,922 — — 1,894 8,962 79% / 21% 1) Disbursements may or may not have been made during the year. 2) Alrik Danielson (Jan–April), Niclas Rosenlew (May), Rickard Gustafson (June–Dec). 3) Allotment of shares under the SKF Performance Share Programme is not covered by the remuneration principles and is reported separately under share based remuneration below. 4) In accordance with separate agreement accounted for in the section Application of performance criteria. 5) The table shows the remuneration Niclas Rosenlew earned speciﬁcally for his assignment as Acting CEO in addition to his remuneration for his ordinary role as CFO and Senior Vice President of the company. 157 SKF Annual Report 2021 REMUNERATION REPORT during the year; 96% relating to adjusted operating proﬁt and 0% relating to cash ﬂow. A separate agreement was made with Rickard Gustafson, in conjunction with his employment by SKF, to grant Rickard Gustafson a minimum of 50% variable salary for the period employed during 2021. The granted minimum variable salary con- stitutes a partial derogation from the requirement in the remuner- ation principles that the variable salary shall be performance based and have predetermined and measurable criteria which need to be satisﬁed for payment of the variable salary. The Board deemed that the derogation was necessary to serve the SKF Group’s long-term interests by attracting and employing the new CEO. Comparative information on the change of remuneration andcompany performance 2020 was the ﬁrst reference year and therefore no year over year changes for the previously reported ﬁnancial years (RFY) will be presented. Coming years will be added so that the annual change over the last ﬁve years will be visible. Table 2 – Change of remuneration and company performance over the last reported ﬁnancial years (kSEK) 2021 vs. 2020 2021 President remuneration 6) +2,506 (+11.7%) 23,899 Adjusted operating proﬁt 7) +1,645,000 (+17.9%) 10,839,000 Cash ﬂow 8) –3,017,000 (–36.5%) 5,248,000 Average remuneration on a full-time equivalent basis of employees in AB SKF +18 (+1.7%) 1,048 Share-based remuneration Outstanding share-related incentive plans Since 2008 the Annual General Meeting has resolved each year upon the SKF Performance Share Programme for senior managers and key employees. The SKF Performance Share Programmes for 2019–2021 have been ongoing during 2021. The number of shares that may be allotted must be related to the degree of achievement of the Total Value Added (TVA) target level, as deﬁned by the Board, for the TVA development during athree-year calculation period. The performance criteria used toassess the outcome of the proposed SKF Performance Share Programme is distinctively linked to the business strategy and thereby to the SKF Group’s long-term value creation, including its sustainability. These performance criteria include a clear link to the SKF Group’s yearly growth, long-term ﬁnancial targets and capital efﬁciency. For further information on said SKF Perfor- mance Share Programme, including the criteria which the out- come depends on, please refer to the Board of Directors’ proposal on SKF’s Performance Share Programme 2021 which can be found on www.skf.com. At the end of 2021, the SKF Performance Share Programme 2019 expired. Allotment of shares was subject to the satisfaction of performance conditions during the three-year period 2019 –2021, compared to the ﬁnancial year 2018. Since the threshold level of the TVA was met and the TVA target was partly met, as decided by the Board, the participants of the programme were awarded 34% allotment of shares under the programme. In total, around 200,000 SKF B shares were allotted under the programme, corresponding to approximately 0.04% of the total number of out- standing shares. Allotment of shares requires that the persons covered by the programme are employed in the SKF Group during the entire calculation period. The current CEO Rickard Gustafson did not participate in the Performance Share Programme 2019 and was therefore not awarded any allotment of shares under the programme. The previous CEO, Alrik Danielson’s employment seized during 2021 and his participation in the Performance Share Programme 2019 therefore lapsed. No CEO allotment of shares was therefore awarded. The current CEO Rickard Gustafson participates in the Perfor- mance Share Programme 2021. Allotment of shares may be made following the expiry of the three year calculation period, i.e. during 2024, if all the conditions of the programme are met and the allot- ment is approved by the Board. 6) Alrik Danielson (Jan–April), Niclas Rosenlew (May), Rickard Gustafson (June–Dec). 7) Operating proﬁt excluding items affecting comparability. 8) Net cash ﬂow after investments before ﬁnancing. 158 SKF Annual Report 2021 REMUNERATION REPORT CAUTIONARY STATEMENT This report contains forward-looking statements that are based on the current expectations of the manage- ment of SKF. Although management believes that the expectations reﬂected in such forward-looking state- ments are reasonable, no assurance can be given that such expectations will prove to have been correct. Accordingly, results could differ materially from those implied in the forward-looking statements as a result of, among other factors, changes in economic, market and competitive conditions, changes in the regulatory environment and other government actions, ﬂuctua- tions in exchange rates and other factors mentioned in the Administration Report in this Annual Report. ® SKF, ALEMITE, BeyondZero, DST, GBC, HYATT, INSOCOAT, KAYDON, Lincoln, PEER, RecondOil, SKF4U, SKF INSIGHT are registered trademarks of the SKF Group. © SKF GROUP 2022 The contents of this publication are the copyright of the publisher and may not be reproduced (even extracts) un less prior written permission is granted. Every care has been taken to ensure the accuracy of the information contained in this publication, but no liability can be accepted for any loss or damage whether direct, indirect or consequential arising out of the use of the information contained herein. The report is originally written in English and translated to Swedish. PUB GCR/R1 19289 EN · March 2022 SKF Annual Report 2021 was published on 2 March 2022. Produced by AB SKF and Solberg Kommunikation. Photo credits: SKF Group, Magnus Cimmerbeck, Anatol Kotte, Oscar Hyltbring, John Hagby, Magnus Fond. Certain images used under license from Shutterstock.com and with the courtesy of KONGSBERG. AB SKF SE-415 50 Gothenburg, Sweden Telephone +46 31 337 10 00 www.skf.com

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SKF Annual Report 2021